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Read This before Tossing Old Tax Records!

If you’re the tidy type and have just filed your tax return for this year, 2024, you might be eyeing that stack of old tax records and wondering if it’s time to declutter. On the flip side, if tossing documents makes you nervous, you’re probably searching for another box to stash them in. So, what’s the right move? You do need to keep them for a certain retention period, but not forever.

Retaining Tax Records

Generally, tax records are retained for two reasons:

1️⃣ In case the IRS or a state agency decides to question the information on your tax returns.
2️⃣ To keep track of the tax basis of your capital assets so that you can minimize your tax liability when you dispose of those assets.

With certain exceptions, the statute of limitations for assessing additional taxes is three years from the return’s due date or its filing date, whichever is later. However, keep in mind that many states have a retention period that’s one year longer than federal law.

Additionally, the federal assessment period extends to six years if more than 25% of a taxpayer’s gross income is omitted from a tax return.

Remember, the three-year clock doesn’t start until a return has been filed. There’s no statute of limitations for false or fraudulent returns meant to evade tax payments.

If none of these exceptions apply to you, then for federal purposes, you can probably discard most of your tax records that are more than three years old. Just be sure to add an extra year if your state has a longer statute.

💡 Examples of Retaining Tax Records

Let’s look at some examples:

Sue filed her 2020 tax return before the due date of April 15, 2021. She can safely dispose of most of her 2020 records after April 15, 2024. Meanwhile, Don filed his 2020 return on June 1, 2021. He should keep his records until at least June 1, 2024. In both cases, if their states have longer retention periods, they should hold onto their records a bit longer. And don’t forget, if a due date falls on a weekend or holiday, the actual due date is the next business day.

The challenge with discarding all records for a particular year once the statute of limitations has expired is that some documents relate to the basis of your capital assets. These basis records should be kept until after the statute has expired for the year in which the asset was sold. To simplify things, consider keeping separate files for each asset.

Examples of Basis Records:

📌 Stock Acquisition Data Tax Records
- If you own stock in a corporation, keep the purchase records until at least four years after the year you sell the stock. This ensures you have the necessary information to accurately report profit or loss on your tax return. If you have a capital loss carryover, hold onto these records until the statute of limitations has passed for the last year you claimed that loss.
📌 Stock and Mutual Fund Statements (if you reinvest dividends)
- Many taxpayers use the dividends that they receive from stocks or mutual funds to buy more shares of the same stock or fund. These reinvested amounts add to the basis of the property and reduce the gain when They are eventually sold. Keep all such dividend statements for at least four years after the final sale.

📌 Tangible Property Purchase and Improvement Tax Records

- Keep records of home, investment, rental-property, or business-property acquisitions; the related capital improvements; and the final settlement statements from the sale for at least four years after the underlying property is sold.

Not sure which tax records to keep or toss in 2024?

We’re here to help you navigate the maze of tax return documents and retention periods. Contact us today, and let’s make sure your financial records are in perfect order!

Tax Tips for Procrastinators in Tax Filing

Consider the Consequences of Late Filing Your Tax Return
If you’ve been procrastinating on tax filing or have skipped past years, it’s time to think about the consequences. From penalties and interest to potential IRS enforcement actions, the costs of delaying can add up. And if you’re due a refund for a prior year, you might risk losing it entirely.

📌 Penalties

If you haven’t filed your return and you owe taxes, stop procrastinating because you could face both a late payment and a late filing penalty. File your return as soon as possible and pay as much as you can to minimize penalties and interest.

📌 Failure-to-Pay

The failure-to-pay penalty is 0.5% of your unpaid taxes for each month (or part of a month) that your payment is late, up to a maximum of 25%. If you delay too long and the IRS issues a levy notice, and you don’t pay within 10 days, the penalty increases to a full 1% per month. It’s a steep price to pay for putting off your tax filing.

⌛Not Filing on Time

There is also a penalty for not filing on time. The failure-to-file penalty is 5% of the tax owed for each month or part of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, the penalty is $435 (for tax returns required to be filed in 2020, 2021, and 2022) or 100% of the tax required to be shown on the return, whichever is less.

💡 Don't Wait... Even if a Refund is Due

No penalty exists for filing late if you’re due a refund. However, waiting too long can cost you your refund and any tax credits you qualify for. To receive a refund, you must file within three years of the original due date.

✅ Enforcement by the IRS

Taxpayers who continue to not file a required return and fail to respond to IRS requests to do so may be subject to a variety of enforcement actions, all of which can be unpleasant.

Need Help with Compliance?

It’s never too late to get back on track. Let us help you navigate the complexities of late tax filing and bring your federal—and state, if applicable—income tax returns into compliance.

Don’t let procrastination turn into a costly mistake. Reach out to us now, and let’s get your tax filings back on track before those penalties add up. Your peace of mind is just a phone call away.

Does it make sense to buy this equipment before year-end?

If you’re eyeing a significant deduction (and who isn’t?), the Section 179 IRS tax code allows businesses to deduct up to $1,080,000 on qualifying capital equipment. However, there’s a cap—businesses can’t spend more than $2,700,000 on such equipment during the tax year to be eligible for this deduction.

To qualify, the equipment must be purchased and in use by 11:59 p.m., December 31, 2024. With supply chain challenges still a concern, it’s wise to make your business purchases sooner rather than later to avoid any last-minute stress.

❓ How much can I save?

Section 179.org offers a simple-to-use calculator to help you estimate your tax savings. Enter the price of your equipment or software to see how much you can save.

❓What qualifies?

According to the Section 179 FAQs, “Most tangible equipment that businesses purchase or lease will qualify for the deduction.”

Common equipment includes machinery, computers, computer off-the-shelf software, office furniture and equipment, qualifying vehicles, or other tangible goods. Qualifying business vehicles with a gross vehicle weight in excess of 6,000 pounds are also included. Property attached to your building that is not a structural component of the building (i.e., a printing press, large manufacturing tools, and equipment) is included. Also, certain improvements to existing non-residential buildings, such as fire suppression, alarms and security systems, HVAC, and roofing are included.

Now is the time to act on this valuable tax-saving opportunity. Tax regulations can change, sometimes even mid-year, so it’s crucial to take advantage of this break while it’s available. Contact us to ensure you’re maximizing your equipment maintenance and purchase deductions.

Want more year-end tax tips?

Download our latest Year-End Tax Planning Guide today to stay ahead of the game. Let’s chat about how your business purchases and equipment maintenance can give you the deductions you deserve.

Reach out today—we’re here to help you navigate the year-end rush with ease.

2024 Child Tax Credit FAQs

If you received the Child Tax Credit or monthly payments in 2021, you might still have questions about how it affects your current tax situation. As we move into 2024, it’s important to stay informed about how these credits play a role in your IRS filings.

We’ve got the answers you need. Here are some common questions that might still be on your mind. If you have additional questions, feel free to reach out. We’re here to help you navigate these tax waters with ease.

❓ What were the 2021 tax changes made for this credit?

The American Rescue Plan Act temporarily expanded the credit for 2021, including:

✅ Allowing a 17-year-old child to qualify for the credit.
✅ Increasing the credit to $3,000 per child, and $3,600 per child under age 6.
✅ Making the credit fully refundable for families who lived in the U.S. for more than six months in 2021.
✅ Requiring half of the credit to be paid in advance by having the IRS send monthly payments from July to December 2021.

❓ What are the child tax credit eligibility requirements?

There are a few requirements, including:

✅ The child must be a U.S. citizen, national, or resident alien, and have a Social Security number.
✅ The child must be claimed as a dependent on your 2021 tax return.
✅ The child must be related to you and generally live with you for at least six months during the year.
✅ You must include the child’s name, date of birth, and SSN on the return.

❓ Can everyone claim the higher per-child tax credit on their 2021 return?

No. The enhanced tax break begins to phase out at modified adjusted gross income (AGI) of $75,000 on single returns, $112,500 on head-of-household returns, and $150,000 on joint returns.

The credit amount is reduced by the AGI threshold overage. However, families ineligible for the higher tax credit may still claim the $2,000 per-child credit when filing their 2021 tax return.

❓ Can I take the higher childcare tax credit for my child that turned 17 in 2021?

Yes, as long as you meet all the other eligibility requirements.

❓ We had a baby in 2021. How is the credit calculated?

Since the IRS didn’t know about the baby, you probably didn’t receive advanced payments. However, you can account for the child on your 2021 return as long as you meet the other eligibility requirements.

❓ I normally do not file a tax return because my income is below the threshold. Can I still claim the child tax credit?

Yes. The credit is fully refundable, even if you don’t owe any taxes, for families who lived within the U.S. for more than six months of the year. Employment or earnings aren’t required to claim the credit.

❓ I have shared custody of my 12-year-old child. My ex claims our child in even years, and I claim her in odd years. Can I claim the credit on my 2021 return if my ex claimed it on their 2020 return?

Yes. If your ex claimed the child in 2020, they likely received the payments in 2021. If your ex used the Child Tax Credit Update Portal to unenroll from payments, they should not have to repay any 2021 amounts on their 2021 return. Even if your ex didn’t unenroll, it shouldn’t affect your ability to claim the credit on your 2021 return.

❓ I don’t remember the payment amounts received in 2021 for the child tax credit. Will the IRS send me a letter telling me how much I received?

Yes. The IRS should have sent Form 6419 in the mail, detailing the payments you received. It’s not sent electronically, so check your physical mail for it.

❓ Do I pay tax on the monthly payments received in 2021?

No. These payments are advance payments for the 2021 Child Tax Credit and are not taxable. You will use IRS Schedule 8812 to reconcile the monthly payments.

❓ I didn’t receive any advance child tax credit payments in 2021. Can I still claim the credit on my 2021 return?

Yes. You can claim the full amount on your 2021 return even if you didn’t receive advance payments. Use Schedule 8812 to determine the amount, then transfer it to your 1040. Don’t forget to include Schedule 8812 with your return.

❓ Do the child tax credit overpayments need to be paid back?

It depends on your specific situation. Give us a call for a detailed explanation.

❓ My ex-spouse owes back taxes on child support. Will child tax credit refunds be reduced for my ex?

Yes. The IRS can use the refund to offset past-due federal taxes, state income taxes, and other federal or state debts, including back child support payments.

❓ Does claiming the child tax credit on my 2021 tax return increase its chance of being delayed?

It depends. Simply claiming it shouldn’t delay your return. However, if the amount you report differs from the IRS’ records or if your calculations are off, your refund could be delayed.

Need More Help?

If you still have questions about how the Child Tax Credit impacts your tax return or need personalized assistance, don’t hesitate to contact us. We’re here to make tax season a breeze for you in 2024!

How to Pay Yourself as a Business Owner

As a business owner, how much should I pay myself on a W2 before year end? This is a common question we get from small business owners. How you pay yourself as a business owner largely depends on your business structure, where you are in your business journey, and a few other key factors.

Here are the two most effective ways to pay yourself as a business owner:

1️⃣ Salary
You pay yourself a regular salary, withholding taxes from your paycheck. This is legally required for businesses that are structured as S- or C-corporations or a limited liability company (LLC) taxed as a corporation. The IRS has a “reasonable” compensation requirement, which means your salary should be comparable with what someone else doing the same job in your industry would be paid.

2️⃣ Owner’s Draw
Outside of running W2 payroll, if you are a sole proprietor, S-Corp, or Partnership, all remaining money in your business account can be distributed to the owners, equally per their ownership percentage, at any time. You are taxed on all of your profits annually, so all the remaining cash in your business account is yours to choose what you do with. Just remember you will owe federal tax on your profits when filing your personal 1040 taxes.

So, How Do You Decide?

Your specific business structure dictates whether a salary, an owner’s draw, or a combination of both is the right move for you.

❓ How Much Should You Pay Yourself?
This is one of the most common questions we get. Most people just guess an amount, which usually causes them to over-pay unnecessary payroll taxes, which is a waste of money.

💡 Start with Your Business’ Net Profit

Your reasonable salary should be based on your business’s net profit, which is your business revenue minus all business expenses, and/or using our third-party software to answer a number of questions to determine what your maximum salary amount should be.

💡Avoid Risking an IRS Audit

What you want to avoid is risking an IRS audit because you did not pay yourself a high enough W2 salary, or have any justification for how you came up with your W2 salary amount.

Steer Clear of These W2 Pitfalls

Here are some common mistakes to avoid when setting up your W2 salary:

📌 Mixing personal and business finances
📌 Not budgeting for taxes
📌 Underpaying yourself, risking an IRS audit due to not meeting the reasonable salary rule for S-Corporations.

Your compensation should be part of your overall business plan. Financial projections should include your salary or owner’s draw to give you a clear picture of what your business needs to thrive. If you’re unsure which method is best for you, we’re here to help.

Get Personalized Tax Advice

Looking for more tailored tips on paying yourself as a business owner? We’re here to help you navigate your business structure and compensation strategy with ease. Give us a call today!

Is the inheritance I received taxable?

A frequent question asked is, “Are inheritances taxable?”

This is a common question that often comes with confusion. When someone passes away, their assets may be subject to an inheritance tax before anything is passed on to the beneficiaries.

Sound bleak?

💡 Inheritance Tax - Exemptions

Don’t worry—most estates don’t end up paying inheritance tax. This is because the tax code exempts a substantial portion of the estate from taxation. For example, the federal estate tax typically kicks in for assets over $12.06 million in 2022 and $12.92 million in 2023, with tax rates ranging from 18% to 40%.

Keep in mind, as with all things tax-related, this exemption isn’t always a fixed amount. It can be reduced by prior gifts exceeding the annual gift exemption, or increased for a surviving spouse by using the decedent’s unused exemption amount.

Since the value of an estate is based on the fair market value (FMV) of the assets at the time of death (or an alternative valuation date six months later), beneficiaries usually receive inherited property at this FMV. In practical terms, if a beneficiary sells an inherited asset, they’ll calculate their gain or loss based on the FMV at the time of the decedent’s death.

Inheritance Tax Examples

Example #1: Inherited Stocks

Joe inherits shares of XYZ Corporation from his father. Since XYZ is publicly traded, its FMV can be easily determined by its market price. If the FMV was $40 per share when inherited and the shares are sold later for $50 per share, Joe would have a taxable gain of $10 per share. This gain would be classified as a long-term capital gain because all inherited assets are treated as long-term, regardless of the actual holding period.

On the flip side, if Joe sells the shares for $35 each, he’d incur a loss of $5 per share.

Example #2: Inherited Property

Joe also inherits his father’s home. Unlike stocks, the FMV of the home isn’t as straightforward and requires a professional appraisal. It’s essential to get this right because if the IRS challenges the valuation, it could lead to complications.

This FMV valuation is often called a step-up in basis, although the FMV can also result in a step-down in some cases. If the decedent was married and lived in a community property state, and if the property was held as community property, the surviving spouse generally receives a 100% basis equal to the FMV, even though they only inherit the deceased spouse’s share.

Not All Inherited Assets Are the Same

Not every asset falls under the FMV rule. If the decedent held assets with deferred untaxed income, those will be taxable to the beneficiary.

Examples of Deferred Untaxed Income:

✅ Traditional IRA Accounts: Taxable to beneficiaries, but with special rules allowing the income to be spread over five years or the beneficiary’s lifetime.
✅ Roth IRAs: Qualified distributions are generally not taxable to the beneficiary.
✅ Compensation: Payments received after the decedent’s death for their services.
✅ Pension Payments: Typically taxable to the beneficiary.
✅ Installment Sales: If the decedent was receiving installment payments, the beneficiary will continue to be taxed on those payments as if the decedent were still alive.

Need More Information on Tax Implications of Inheritances?

If you have questions about the tax consequences of an inheritance—whether you’re planning ahead or dealing with one right now—give us a call. We’re here to help you navigate the complexities and make the most of your inheritance.