At Caiafa & Company LLC, we want our clients to have current information regarding our CPA and tax services. Your financial situation is always changing, and if your tax situation or retirement plan needs to be adjusted, we are always ready to be on hand to help. Whether you are an individual or a small business owner serving the Milford and New Haven area, our office has the resources to help you. Our team takes pride in our communication level; we can be in touch as often as you need, regardless of the service you require. With that in mind, we want to make sure that you stay up to date with the current news from our office and the resources we recommend. Take a look at the links below if you need more information about our tax services.
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Watch Out For These Unexpected Tax Surprises!
No one likes surprises from the IRS, but they do occasionally happen. Here are some examples of tax situations you could find yourself in and what to do about them.
• Kids getting older tax surprise. Your children are a wonderful tax deduction if they meet certain qualifications. But as they get older, many child-related deductions fall off and create an unexpected tax bill. And it doesn't happen all at once.
As an example, one of the largest tax deductions your children can provide you is via the child tax credit. If they are under age 17 on December 31st and meet several other qualifications, you could get up to $2,000 for that child on that year’s tax return. But you’ll lose this deduction the year they turn 17. If their 17th birthday occurs in 2023, you can’t claim them for the child tax credit when you file your 2023 tax return in 2024, resulting in $2,000 more in taxes you’ll need to pay.
• Limited losses tax surprise. If you sell stock, cryptocurrency or any other asset at a loss of $5,000, for example, you can match this up with another asset you sell at a $5,000 gain and - presto! You won’t have to pay taxes on that $5,000 gain because the $5,000 loss cancels it out. But what if you don’t have another asset that you sold at a gain? In this example, the most you can deduct on your tax return is $3,000 (the remaining loss can be carried forward to subsequent years).
Herein lies the tax surprise. If you have more than $3,000 in losses from selling assets, and you don’t have a corresponding amount of gains from selling assets, you’re limited to the $3,000 loss. So if you have a big loss from selling an asset in 2023, and no large gains from selling other assets to use as an offset, you can only deduct $3,000 of your loss on your 2023 tax return.
• Getting a letter from the IRS surprise. Official tax forms such as W-2s and 1099s are mailed to both you and the IRS. If the figures on your income tax return do not match those in the hands of the IRS, you will get a letter from the IRS saying that you’re being audited. These audits are now done by mail and are commonly known as correspondence audits.
Assuming you already know you received all your 1099s and W-2s and confirmed their accuracy, verify the information in the IRS letter with your records. Believe it or not, the IRS sometimes makes mistakes! It is always best to ask for help in how to correspond and make your payments in a timely fashion, if they are justified.
Please call to schedule a tax planning session so you can be prepared to navigate around any potential tax surprises you may encounter on your 2023 tax return.
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Year-End Tax Cutting Moves to Consider
Here are moves you can make to reduce your taxable income. But the year is quickly coming to a close, so plan accordingly.
• Max out pre-tax retirement savings. The deadline to contribute to a 401(k) plan to get a 2023 taxable income reduction is December 31st. So if your employer's plan allows it, consider making a last-minute lump sum contribution. For 2023, you can contribute up to $22,500 to a 401(k), plus another $7,500 if you're age 50 or older. Even better, you have until April 15, 2024, to contribute up to $6,500 into a traditional IRA. And as long as your income does not exceed phaseout limits, you can reduce your taxable income on your 2023 tax return.
• Convert to a Roth IRA. Consider converting some or all of your traditional IRA, SEP IRA, or SIMPLE IRA into a Roth IRA. Although you pay income tax on the amount of the Roth conversion the year it is made, subsequent growth is tax-free in a Roth IRA, and withdrawals from the account are 100% tax-free after five years from the date of the conversion.
• Tax loss harvesting. If you own stock outside a tax-deferred retirement plan, you can sell your under-performing stocks by December 31st and use these losses to reduce any taxable capital gains. If your net capital losses exceed your gains, you can net up to $3,000 against other income such as wages. Losses over $3,000 can be used in future years.
• Selling appreciated assets. Consider selling appreciated assets in the tax year that helps you the most. While this strategy may be hard to accomplish this late in the year, it is still worthy of consideration. To do this, estimate your current year's taxable income and compare it to next year's projected income. Then sell the appreciated asset in the year that will yield the lowest tax. Remember to account for the 3.8% net investment income tax in your estimates.
• Review health spending accounts. If you participate in a Health Savings Account (HSA), try to maximize your annual contribution to reduce your taxable income. Remember, these funds allow you to pay for qualified health expenses with pre-tax dollars. More importantly, unlike Flexible Spending Accounts (FSA), you can carry over all unused funds into future years. If you do have an FSA, you can carry forward a maximum of $610 from 2023 into 2024 if your plan allows this. The deadline for contributing to your Health Savings Account (HSA) and still getting a deduction for the 2023 tax year is April 15, 2024. The maximum contribution for 2023 is $3,850 if single and $7,750 for married couples. If you're age 55 or older, you can add $1,000 to your HSA contribution.
While the year is quickly coming to an end, there is still time to reduce your 2023 tax liability, but only if you act now.
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The Power of Cultivating Gratitude
It costs nothing to say thank you. Yet cultivating gratitude in your life may be one of the most rewarding moves you can make. Not only does it invoke warm fuzzies in everyone involved, expressing your appreciation may actually improve your health and well-being.
A landmark study by gratitude researcher Robert A. Emmons has shown that gratitude can reduce physical illness symptoms and toxic emotions. It can even help you sleep better and longer, according to a study published in Applied Psychology: Health and Well-Being.
So what are some ways you can make gratitude part of your everyday life? Here are a few suggestions to help you get started:
• Write it out. Write out what you’re thankful for in your life. This may mean making a nightly habit of writing in a journal or jotting down a message to a loved one and giving it to them. You could also make some sticky note reminders of what you’re grateful for and hang them on your mirror to read each morning.
• Share a good memory. Reminiscing often stirs up feelings of gratitude. For instance, think about the time you first met a close friend in grade school. Contact them and tell them how grateful you are that it happened. Send a photo of that family vacation when you all shared a common experience like learning to water ski. When you think about it, you will quickly discover happy memories to share with loved ones.
• Offer your service. Show your gratitude through your actions. If you appreciate your community, join a group to clean up the park and streets. Provide a positive online review for your favorite local café. Or volunteer at a Veterans Affairs hospital.
• Lend an ear. Some of the most meaningful moments involve simply being heard. Return the favor. If your sister is usually the one who lets you ramble on about work grievances and family drama, it’s time to give her a turn. Let her know you’re there and ready to listen. Maybe you avoid your chatty (albeit helpful) coworker. When you see them next, give them 5 minutes of your time.
• Pay it forward. Did your neighbor share a gutter-cleaning hack with you? Next time you see someone on your street cleaning their gutters, offer to lend a hand. See a mom digging for spare change at a check out register? Pay it for her. Let the appreciation of your good deed change someone else’s outlook for the day. When they offer to pay you back, just tell them to pay it forward.
There are opportunities to cultivate gratitude all around us. Refocusing on what you appreciate on regular basis can help you live a healthier, more satisfying life.
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Spend Less with These 5 Money Tips
Government data shows that record inflation from the last few years started to slow down throughout 2023, but much of the damage has already been done. Every bill we pay and purchase we make costs more now, from insurance to clothing, and groceries to household supplies. Here are some tips to spend less to help offset the effect from these now permanently higher prices.
• Pay down high-interest debt. You can start spending less money today by paying down high-interest debt. Data from the Federal Reserve shows people who don't pay off their credit card balance each month pay an average interest rate of 22.16%. For a monthly credit card payment of $75, this interest expense costs you $17 a month, or just over $200 a year.
• Revisit your subscriptions. Write down how many monthly subscriptions you're paying for, then add up the monthly cost. Then ask yourself the following questions: Can you do without some of these subscriptions? Can you cut the cost of some of these subscriptions? Are there some with overlapping benefits? Maybe you'll discover a subscription you completely forgot about. You don't have to cancel all of them, but getting rid of just a few can help you spend less each month.
• Shop around for insurance. Loyalty to an insurance company doesn't always pay off. Consider shopping around and comparing rates for homeowners’, auto, & umbrella insurance, along with other insurance coverage you may have.
• Eat at home. Limit how often you dine out or stop for take-out. Your wallet will thank you! According to data from the Bureau of Labor Statistics, overall food spending was up 12.7% in 2022, partly driven by a 20% increase in food spending away from home.
• Start using a budget. Finally, spend less by creating a written monthly budget and sticking to it. Find a budgeting app that you like the look and feel of, then create a budget within that app to help you decide how much to spend each month in various categories. Once the budget has been created, be sure to keep it updated throughout the month, instead of waiting until the last week to get it up-to-date.
The cost of everything may have skyrocketed, but you still have at least some control over where your money goes each month. Consider these steps to cut your spending, and you may be surprised at how much you save.
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Will That Be Cash or Barter?
How swapping products and services could benefit your business
Bartering, the act of trading goods or services with other goods or services instead of money, is more popular than ever. And with many businesses dealing with constrained cash flow, bartering may be a good way to create value for your business.
The new world of bartering
Bartering traditionally worked something like this: You know someone who has something you need and you have something they need. You talk, figure out comparable value and make the swap. Everybody’s happy. But other than blind luck, finding a match to barter with was very difficult.
But with online platforms, bartering is now easier than ever with the creation of posting sites and exchanges. Posting sites provide a platform where businesses can skim for or post items they are looking to acquire or trade. These are usually free and unmonitored, so surf at your own risk. Bartering exchanges offer a marketplace and bartering credits that act as a middleman. You can trade goods and services and receive credit that you can use towards acquiring a different good or service. These tend to be actively managed and typically charge a monthly membership fee.
Remember, most bartering can create a taxable event. If you receive something of greater value or trade a deductible expense for a non-deductible expense, the difference is taxable income and needs to be reported on your tax return — so careful record keeping is very important.
When bartering can help
• You have a unique need with no available resources. Identify what you do well and look at your income statement to identify services you typically must pay for yourself. For example, consider a photographer who is paying a monthly tech support bill to administer their website. That photographer could reach out to the web development company to see if they need photos for their website services or other marketing material. They then barter their photography for coding expertise. It saves each party the necessary cash to purchase these services.
• You need to offload aging inventory. As inventory ages, decisions need to be made. Letting it sit can take up valuable space and paying to dispose of it is usually not the most efficient practice. There might be a business that has the same issue, but with something you can use. Take some time to think about the type of businesses that might find your old inventory useful.
• You have customers who can't pay. Use bartering as a method for collecting from customers who can't pay your invoice. Instead of sending an account to collections, consider whether your customer has something of value your business could use. Even if your customer doesn't have anything of direct value for your business, you might be able to accept an asset and then sell it online to settle your outstanding bill.
Finding bartering partners can often have long-term benefits without having to dip into cash reserves. And if structured correctly, the service provided can offset the expense of the service received.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
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Year-End Tax Planning Tips for Your Business
As 2023 winds down, here are some ideas to help you prepare for filing your upcoming tax return:
• Informational returns. Identify all vendors who require a 1099-MISC and a 1099-NEC. Obtain tax identification numbers (TINs) for each of these vendors if you have not already done so.
• Shifting income and expenses. Consider accelerating income, or deferring earnings, based on profit projections.
• Be prepared to receive a Form 1099-K. You may receive a Form 1099-K from each payment processor from whom you receive $600 or more in payments. In addition to credit card companies and banks, payment processors can include Amazon, Etsy, PayPal, Venmo and Apple Pay. You'll need to include the 1099-K on your tax return.
• Categorize income and expenses. The best way to prepare for receiving a 1099-K is to organize your records by major categories of income, expenses and fixed asset purchases. If your accounting records are accurate, then any tax form, including a 1099-K, should be easy to tie out to your books.
• Separation of expenses. Review business accounts to ensure personal expenses are not present. Reimburse the business for any expenses discovered during this review.
• Create expense reports. Having expense reports with supporting invoices and business credit card statements with corresponding invoices will help substantiate your deductions in the event of an audit.
• Fixed asset planning. Section 179 or bonus depreciation expensing versus traditional depreciation is a great planning tool. If using Section 179, the qualified assets must be placed in service prior to year-end.
• Leveraging business meals. Business meals with clients or customers are 50% deductible. Retain the necessary receipts and documentation that note when the meal took place, who attended and the business purpose on each receipt.
• Charitable opportunities. Consider any last-minute deductible charitable giving including long-term capital gain stocks.
• Cell phone record review. Review your telephone records for qualified business use. While expensing a single landline out of a home office can be difficult to deduct, cell phone use can be documented and deducted for business purposes.
• Inventory review. Review your inventory for proper counts and remove obsolete or worthless products. Keep track of the obsolete and worthless amounts for a potential deduction.
• Review your receivables. Focus on collection activities and review your uncollectible accounts for possible write-offs.
• Review your estimated tax payments. Recap your year-to-date estimated tax payments and compare them to your forecast of full year earnings. Then make your 2023 4th quarter estimated tax payment by January 16, 2024.
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Each month, we will give you tips and useful information to help you protect your finances, begin planning on ways to save for your future, or how to begin preparing your taxes. Our goal is to help you get the information you need for a financially savvy today and tomorrow. So sign up for our monthly client newsletter today to stay up-to-date with news from our office and to receive special offers from our team.Our Latest Newsletter