For parents, challenges come from every direction – feeding times, car seats, sleep schedules, strollers, child care and of course … taxes. What most parents do not consider is that these bundles of joy complicate their tax situation!

Whether you are a parent, grandparent, or know someone who is expecting, here are some tax tips to consider:

• Initiate a 529 education savings plan. 529 education savings plans are a great way to kick off the baby’s savings for the future. These plans offer low-cost investments that grow tax-free as long as the funds are used to pay for eligible education expenses (including elementary and secondary tuition). States administer these plans, but that doesn’t mean you are stuck with the plan available in your home state. Feel free to shop around for a plan that works for you. Starting to save early, even a little bit, maximizes the amount of tax-free compound interest you can earn in the 18+ years you have before going to college.

Bonus tip for family and friends: Anyone can contribute up to $17,000 per year ($18,000 in 2024) to the plan for each child! In addition, there is a special provision for 529 plans that allows five years worth of gifts to be contributed at once — a great estate-planning strategy for grandparents. And new this year, there is an opportunity for grandparents to open these accounts with grandchildren as beneficiary and not have it impact their federal needs calculation!

• Update Form W-4. Every year, parents need to review their tax withholding. Remember the birth of a child brings new tax breaks including a $2,000 Child Tax Credit and Child and Dependent Care Credit for child-care expenses. These credits can be taken advantage of now by lowering tax withholdings and increasing take-home pay to help cover diapers and other needs that come with babies and children. On the other side of the coin, these benefits fall away as your kids age. The Dependent Care Credit is for children under the age of 13 and the Child Tax Credit is available under the age of 17. So plan accordingly.

• Prepare for medical expenses. Having a baby is expensive. So is having kids! Fortunately, there are ways to be tax smart in covering the predictable medical and dental expenses. The first thing to do is try to pay for as many out-of-pocket expenses with pre-tax money. Many employers offer tax-advantaged accounts such as a Health Savings Account (HSA) or a Flexible Spending Account (FSA). So check this out and fund them as much as possible. And while it is more difficult to use medical expenses as an itemized deduction, it is impossible to do if you do not have receipts.

Given the tax considerations of having a family, review this information and forward this tip to anyone who has children. Taking full advantage of the tax benefits that come with being a parent can make a difference. Please call if you have any questions.

There are multiple situations where you need to find out what the IRS knows about you. It could be for the purpose of obtaining a loan, filing past year tax returns, or simply getting a copy of tax records for your files. A great place to start is understanding the IRS’s new online account function.

Background

In the past, if you needed a copy of a tax return or wanted copies of W-2s and 1099s you called the IRS or filled out a form and sent it to them. You then waited. Now this information is available online through their Get Transcripts function.

How it works

Get registered using ID.me. To get copies of your information from the IRS, you must first register and have your identity confirmed. The identity confirmation process is either an interview or verification using an approved government issued id like a passport or a valid driver’s license. So before starting the process it is best to be prepared with:

• Original copies of either your drivers’ license or passport
• A cell phone to take a selfie and to access software required by ID.me
• Have a secure email and cell phone number
• A secure computer on a private network

Getting access to your records. Once you have your identity confirmed, the IRS will allow you to set up a password and multi-factor authentication to access to your account.

Options within the account. Once your account is set up you can see:

• Your account status
• Payment function and activity
• Copies of notices and letters
• Any authorizations to access information or help you
• Tax records

Available tax records

In the Get Transcripts function, you can retrieve copies of W-2s and 1099s filed by others on your SSN, review copies of original 1040 transcripts and any changes or modifications of the tax return. You can also retrieve history of advanced child credit payments and any economic impact payments.

Some Tips

Use caution. Setting up an online account with the IRS requires sharing sensitive information. So only do this on a secure device, on a home or private network. Make sure you are on the IRS website. DO NOT use a link to the site.

You do it. The online retrieval service is for individuals. Do not have someone else set up your account and do not share your login information with anyone.

Online versus phone or mail. This new retrieval service saves a lot of time versus filing out forms or requesting information. So consider signing up only if you are in need of a form and cannot get it any other way.

The online service is not for everyone. While it does save time, if you are at all wary of the service, ask for help. It is just a phone call away.

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In the fourth move in three years, the IRS in late November changed the reporting requirements for Form 1099-K. So why should you care? Well pay attention if you’ve ever sold anything on Amazon or eBay, have ever sold tickets to sporting events or concerts, or received money from payment apps like Venmo.

Background

The IRS wants to track the receipt of money from third-party credit card and other payment processors. This is because much of this activity is deemed business activity AND it is under-reported. The IRS uses Form 1099-K to report these transactions and for years the threshold for reporting was $20,000 and 200 transactions per payment processor. The law was then changed to lower the threshold to $600 and any number of transactions.

Current situation

After delaying the implementation of the $600 threshold two times in prior years, the IRS once again rolled back the reporting threshold for 2023 to $20,000 and 200 transactions. This repeated change, albeit a welcome one for many taxpayers, is also creating mass confusion as the delay was put in place a mere 45 days before the forms start hitting inboxes.

What you need to know

The income is reportable whether you receive the form or not. So if you have a side hustle on Amazon, or have a business reselling tickets, you are required to report it.

You may OR may not receive a Form 1099-K. Given the late change, you may still receive a Form 1099-K this January or February even if the payment processor is not required to report it. So if you receive a form, please keep it. The activity is still being reported to the IRS.

The limits are still coming down, so be prepared. The recent change is only temporary. The IRS will be lowering the threshold over the next few years to get to the $600 limit, so be forewarned.

How to report business activity varies. If you have a side hustle, sell or resell tickets online, or use digital payment systems to receive payment for goods or services you are in business. This needs to be reported. How it is reported can vary so call for help.

Here are some tips that should trigger you to conduct a full tax planning session to ensure your tax bill next year is not higher than it needs to be.

1. You owed tax last year. If you have not adjusted your withholdings, you could be in for a big tax bill. Time to take a look and plan accordingly.

2. Your household income changes dramatically. Whether higher OR lower, a change in income will impact your taxes, especially if it impacts availability of deductions or credits.

3. You are getting married or divorced. Married filing joint brings benefits and tax surprises. So does the impact of being single once again.

4. You have kids attending college next year. There are a number of tax programs that can help.

5. You have a small business. There are depreciation benefits plus the qualified business income deduction to consider. Plus you will need to understand the flow through impact your business profits will have on your personal tax return.

6. You plan on selling investments. Capital Gains tax rates can now range from 0% to 37% (depending on long or short term gains and your income level).

7. There are changes in your employer provided benefits. These changes could impact your taxable income this year.

8. You buy, sell or go through home foreclosure. There are tax benefits AND tax surprises when you buy or sell a home. A planful approach can make all the difference.

9. You have major medical expenses. The threshold for itemizing medical deductions is 7.5%. This means to itemize these expenses, they must exceed 7.5% of your income. But with proper planning, there are other ways to pay these expenses with pre-tax money!

10. You recently lost or changed jobs. Federal unemployment benefits are taxable and need to be accounted for in your tax plan.

11. Your estate has not been reviewed in the past 12 months. New gift tax and estate tax laws make 2013 a key year for an estate tax review.

12. You have a new child or dependent. These treasures bring joy AND a different tax obligation!

If any of these triggers apply to you, please schedule a tax planning appointment.

Selling property to a family member or loved one is deemed a related party transaction by the IRS. If contemplating a transaction like this, you need to review the tax consequences of your decision BEFORE you act. As you might imagine, related party transactions covers relatives like your children, grandchildren and siblings, but it also applies to business entities you own. Here are four common situations you may encounter, and tips to help you avoid tax trouble:

1. Installment sales. When selling your property over two or more years, your transaction is deemed an installment sale. With an installment sale you can defer tax on your gain until the tax years in which payments are actually received. However, if you sell the property to a related party who disposes of it within two years, the remaining tax is due immediately!

Tip: To solve this problem, insert language in the legal agreement with your related party that does not allow the disposition of the property within two years.

2. Selling at a discount. If you’re selling a house to a related party, you may wish to give that person a sweetheart deal. Unfortunately, the IRS may reclassify the transaction as a gift if the property is sold at considerably less than its fair market value (FMV). Fortunately, you have some wiggle room. If you discount the sale by less than 25 percent, you should be OK.

Tip: Err on the side of safety by having an appraisal of the property before the transfer date OR build documentation that justifies the FMV.

3. Transferring remainder interests. In some cases, a homeowner may transfer an interest in a home to his or her estate while continuing to live there. Although this may meet certain objectives, the estate can’t take advantage of the $250,000 home sale exclusion ($500,000 for joint filers). However, if the heirs subsequently meet the two-out-of-five-year ownership and use requirements, the exclusion becomes available.

Tip: Prior to transferring interest in your home to anyone (including a trust or an estate), understand the impact of this action on the tax-free home gain exclusion.

4. Like-kind exchanges. Often, instead of selling business or investment property, an owner may trade for another, similar property hoping to either defer or avoid taxable gains. Under recent legislation, tax-free exchanges of like-kind properties are eliminated, except for qualified real estate transactions. Tax is generally deferred until the replacement property is sold, but the tax law imposes a two-year holding requirement on the parties to the deal. Alternatively, you may qualify under a special exception, such as proving tax avoidance wasn’t the purpose of the sale.

Tip: Related property transactions of this type can get complicated. Ask for a review of your situation before trading any property.

Transferring assets, including property, to family gets the attention of the IRS. Should you be contemplating this, reach out for assistance before making the move.

The IRS is being very public about increasing the review of tax returns. The best defense for you is to be prepared before it happens. Here are some suggestions:

The one-two punch

To prove your deduction, most auditors look for two key documents: receipts and proof of payment.

1. Receipts. This is the first of the key documents you must have to validate a deduction. The receipt should clearly show the company or entity, the date, the value of the activity and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation.

2. Proof of payment. The second key document to defend your deduction is proof of payment. You will need a canceled check, a bank statement or a credit card receipt and related statement.

Contemporaneous is key

Your proof of payment and receipts should generally match the date of the activity. The IRS is quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken.

Other proof is often required

In addition to the above, there are certain deductions that require additional documentation. Here are the most common;

Mileage logs. You will need to show properly-maintained mileage logs for business miles, charitable miles and any medical mile deductions.

Business records. You will need financial statements for any business-related activity with supporting documentation.

Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. In addition, to receive the capital gain exclusion for a home sale, you will need to prove residency for two of the last five years. So keep records that show your physical presence to support your tax filings.

Non-reimbursement. If you claim any education credits, you will need to show that you actually spent money for qualified expenses at qualified institutions. You will also need to show that your claimed expenses were not reimbursed through scholarships or grants.

Defending your tax return during an audit can seem daunting. Fortunately, with some thoughtful planning, an audit can readily turn into a NO CHANGE audit.

Everybody likes getting something for free, and taxes are no different. If you invest in securities such as municipal bonds (munis) or municipal bond funds, you can generate tax-free interest income. Here is what you need to know.

Advantages of municipal bonds

You pay zero federal tax on municipal bond investment income. This makes municipal bonds more attractive than many comparable taxable investments. A municipal bond paying 6 percent to an investor in the 24 percent tax bracket is actually a better investment than a taxable bond paying interest at 7.9 percent, due to the federal income tax break.

What’s more, municipal bond income isn’t counted for net investment income tax purposes. So if you are subject to this 3.8 percent surtax, municipal bonds provide an additional tax break to you. And, if the bond is issued by an authority within the state where you reside, it’s also exempt from any state income tax.

For these reasons, municipal bonds are a popular investment, especially among retirees because they are often stable, and most bonds carry a relatively low risk.

Potential consequences

While the benefits of municipal bonds make it an attractive option for many investors, there are potential downsides:

• Alternative minimum tax. If you invest in certain private activity bonds — such as some bonds used to finance projects like a stadium — the income may cause alternative minimum tax complications.
• Capital gains tax. When you sell a municipal bond at a profit, you owe capital gains tax on the sale. For instance, if you buy a bond for $5,000 and sell it for $6,000, you’re taxed on the $1,000 gain.
• State tax possibility. If you invest in municipal bonds issued by another state, the interest income is taxable by the state where you reside.
• Bond risk. Municipal bonds, just like corporate bonds, carry a risk of default. So it is important to understand what you are buying and the likelihood of repayment risk.
• Taxes on Social Security benefits. Interest income from municipal bonds could make up to 85 percent of your Social Security benefits taxable. The taxation of Social Security benefits is based on a calculation that specifically includes tax-free municipal bond income.

Investing in municipal bonds can provide tax-free, stable income, but you need to understand how the investments fit with your situation to maximize the tax savings.

Putting off distributions and holding assets in your retirement accounts as long as possible may seem like a good idea, but waiting too long can cause a major tax problem. When you reach age 73, the trigger requiring minimum distributions (RMDs) from qualified retirement accounts is initiated, potentially causing unwanted tax obligations.

RMDs explained

Required minimum distributions is a formula applied to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined contribution plans that calculates how much you must withdraw from your retirement accounts each year. If you fail to take out the minimum distributions, amounts not distributed on a timely basis can be subject to a 25% penalty (or 10% if the problem is corrected within two years).

ALERT: Prior to 2023, the RMD penalty was a whopping 50%!

Thankfully, there are other beneficial rule changes that impact required minimum distributions:

No distributions required while you are still working. You may now delay withdrawing funds from employer plans like a 401(k), past age 73 as long as you are still working and are not a 5%-or-greater owner of the company.

RMD rules are different for Roth accounts. Roth IRAs are not subject to the RMD rules while you are still living. And beginning in 2024, Roth 401(k) and Roth 403(b) minimum withdrawals are not required.

The RMD rules ensure the deferred tax benefit for certain retirement accounts does not extend indefinitely into the future. In other words, the IRS wants their cut by applying income taxes to your tax-deferred savings account balances. The amount you must take out each year is based upon your age, your spouse’s age, and your filing status.

The tax planning opportunity

If you wait to start taking money out of your retirement accounts, the balance in your accounts may be very high when you reach age 73. These higher balances mean a higher annual taxable withdrawal amount. If your required retirement plan distribution is large enough, it may apply a higher marginal tax rate on your withdrawals, and trigger taxes on your Social Security benefits. Depending on your income and filing status, up to 85 percent of your Social Security benefit can be subject to income tax.

The key is to be tax efficient in your withdrawals every year, and long before the required minimum distribution rules take away your planning flexibility.

Some tips

• Plan withdrawals. Once you hit age 59½, you may withdraw money from qualified, tax-deferred retirement accounts without experiencing an early withdrawal penalty. To reduce future tax risk on your Social Security benefits, manage annual disbursements from your retirement account(s) to be more tax efficient when you reach age 73.
• Start receiving Social Security. You may begin full Social Security benefits after reaching the minimum retirement age. But remember, your benefit amount can increase if your start date for receiving Social Security benefits is delayed until age 70. Consider this as part of your plan to be tax efficient.
• See an advisor. There are many moving parts in planning for retirement. These include Social Security benefits, pension plans, savings, and retirement accounts. Ask for help to create the proper plan for you and your family. One element of the plan should include being tax efficient to avoid the tax torpedo.

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.