#taxes

By:  Henry VanBuskirk, CFP®, Wealth Manager

Our team would like to provide an update on a recent blog post discussing tax relief and the tax filing deadline for certain counties in California. The individuals in counties originally discussed in that posting will have until May 15^th, 2023, to file tax returns, but some counties are automatically extending that tax filing deadline to October 16^th, 2023. If you are a resident in one of the following counties, you qualify for additional relief and your tax filing deadline is October 16^th, 2023.

Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Nevada, Orange, Placer, Sacramento, San Benito, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, San Diego, San Francisco, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, and Yolo

Residents in Alabama and Georgia may also be able to receive tax relief and have the tax filing deadline extended to October 16^th, 2023.

This means that IRA contributions and Health Savings Account (HSA) contributions for Tax Year 2022 may be made as late as October 16^th, 2023. Estimated tax payments normally due on April 18^th, June 15^th, and September 15^th, and the California Passthrough Entity (PTE) payments for all taxpayers in affected areas are due between now and October 16^th.

For those that are claiming disaster-related casualty losses or would like to request copies of tax returns and waive the fee for requesting prior year tax returns, you may do so by completing Form 4684 ‘Casualties and Thefts’ or Form 4506 (or 4506-T) ‘Request for Copy of Tax Return’ (or ‘Request for Transcript of Tax Return’) respectively. Please reference in bold letters at the top of the applicable form “California, severe winter storms, flooding, and mudslides” and reference the FEMA disaster declaration number, FEMA-3591-DR. The IRS also has a disaster hotline (866-562-5227) and FEMA’s website can be used: https://www.disasterassistance.gov/ for any questions on the above deadlines and inquiries on whether or not you qualify for disaster relief.

Please visit the disaster assistance overview page on the IRS website for further guidance if you live in an impacted area.

Please let us know how we can be of help during what may be a difficult time for you and your family.

Sources:

1. https://www.irs.gov/newsroom/irs-announces-tax-relief-for-victims-of-severe-winter-storms-flooding-landslides-and-mudslides-in-california.
2. https://www.irs.gov/newsroom/irs-may-15-tax-deadline-extended-to-oct-16-for-disaster-area-taxpayers-in-california-alabama-and-georgia
3. https://www.irs.gov/businesses/small-businesses-self-employed/disaster-assistance-and-emergency-relief-for-individuals-and-businesses

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

The IRS announced that the starting date for when it would accept and process 2022 tax-year returns was Monday, January 23, 2023.

Tips for making filing easier

To speed refunds and help with tax filing, the IRS suggests the following:

• Make sure you have received Form W-2 and other earnings information, such as Form 1099, from employers and payers. The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2023. You may need to allow additional time for mail delivery.
• Go to irs.gov to find the federal individual income tax returns, Form 1040 and Form 1040-SR (available for seniors born before January 2, 1958), and their instructions.
• File electronically and use direct deposit.
• Check irs.gov for the latest tax information.

Key filing dates

Here are several important dates to keep in mind:

• January 13. IRS Free File opened. Free File allows you to file your federal income tax return for free [if your adjusted gross income (AGI) is $73,000 or less] using tax preparation and filing software. You can use Free File Fillable Forms even if your AGI exceeds $73,000 (these forms were not available until January 23). You could file with an IRS Free File partner (tax returns could not be transmitted to the IRS before January 23). Tax software companies may have accepted tax filings in advance.
• January 23. IRS began accepting and processing individual tax returns.
• April 18. Deadline for filing 2022 tax returns (or requesting an extension) for most taxpayers.
• May 15. Deadline for filing 2022 tax returns (or requesting an extension) for California taxpayers that reside in one of the federally declared disaster area and that are eligible for tax relief from the recent storms.
• October 16. Deadline to file for those who requested an extension on their 2022 tax returns.

Awaiting processing of previous tax return?

The IRS is attempting to reduce the inventory of prior-year income tax returns that have not been fully processed due to pandemic-related delays. Taxpayers do not need to wait for their 2021 return to be fully processed to file their 2022 return.

Tax refunds

The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if the return is filed electronically, any tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.

Prepared by Broadridge. Edited by BFSG. Copyright 2023.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Michael Allbee, CFP®, Senior Portfolio Manager

There are many tax strategies available for business owners, but it requires proper planning throughout the year. Here are some things to consider as we approach the year-end to minimize your tax liability.

Take advantage of the expiring “Tax Cuts and Jobs Act” (TCJA) bonus depreciation

In 2017, the TCJA made it so business owners could deduct 100% of qualifying business property (i.e., new equipment, auto above 6,000 lbs., etc.) in the first year it was put to use. However, this regulation is expiring in 2022, and by 2023, owners will only be able to deduct 80% of qualifying properties within the first year of investment. Then, the percentage drops by 20% each following year. If you need to purchase business-related property, now is the time to do it.

Defer revenue and accelerate expenses (or vice versa)

Many small businesses use the cash method of accounting on their books and tax returns. Under the cash method, a company recognizes income when it’s received and expenses when paid — in other words, when cash actually changes hands. That creates some interesting tax planning strategies.

If you expect to be in a lower tax bracket next year, you might want to defer income to next year, when you’ll pay taxes at a lower rate. The same concept works with expenses. If you’re in a high tax bracket this year, you might want to accelerate expenses in 2022 to reduce your taxable income.

On the other hand, it might make more sense to accelerate income into this year — especially if you think tax rates will increase in the near future. In that case, you might want to send your invoice and try to collect payment from your client in 2022, so more income will be taxed at your current tax rate.

Here’s a handy guide for when to accelerate or defer income and expenses.

Consider the following strategies for executive compensation such as stock options

• Consider the timing of non-qualified stock option (NSO) exercises to fill lower marginal tax brackets.

• Consider qualifying disposition of incentive stock options (ISOs) for potential long-term capital gains treatment.

• Consider disqualifying disposition or tandem exercise of ISOs to avoid the alternative minimum tax (AMT).

Take advantage of the home office deduction (if you qualify)

If you have a home office, you may be eligible to deduct direct and indirect expenses for your home office. What can you deduct if you qualify? Read further here.

Use required minimum distributions (RMDs) to pay estimated taxes

Business owners typically pay quarterly taxes. For those that want to pay as late as possible, instead of quarterly taxes, you can have money withheld from IRA distributions to pay for taxes.

Take full advantage of tax-advantaged retirement accounts

Set-up or contribute to a retirement account. Deductible contributions to a retirement account such as an individual 401(k), SEP-IRA, or SIMPLE IRA can reduce your 2022 taxable income. Contributing to your retirement accounts may help you build retirement savings over time – without impacting your take-home pay as much as you may think.

Make charitable contributions

If you are charitably inclined, you should plan your donations in advance to ensure you maximize the tax benefits. The most common way to make a charitable gift is with cash. This works fine for smaller gifts (think one-time small charitable donations) but for larger charitable gifts there might be better alternatives to consider. Consider gifting appreciated assets or gifting from your IRA (Qualified Charitable Distributions).

If you’d like to learn more about tax planning strategies unique to your business, feel free to Talk With Us!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Arash Navi, CFP®, CPA, Controller & Wealth Manager

Our goal is to help our clients build and grow their wealth and tax planning plays an important role in this process. We recommend that you mark your calendar to review your finances in the first week of October, annually. Take this time to review your income for the year from employment, businesses, investments, or any other sources. This will help you project your tax liability ahead of time and allow your financial advisor or tax accountant to find strategies to reduce your tax burden. Implementing this consistently and reducing your tax burden annually will have a compounding impact over the years and increase your retirement nest egg. Here are a few tax planning strategies to keep in mind:

IRAs and Retirement Plans

Take full advantage of tax-advantaged retirement accounts. By contributing to Traditional IRAs and employer-sponsored retirement plans such as 401(k) plans, you can reduce your taxable income and lower your taxes. For 2022, you can contribute up to $20,500 to a 401(k) plan ($27,000 if you’re age 50 or older) and up to $6,000 to a traditional IRA ($7,000 if you’re age 50 or older).

Roth Conversions

If you are in a lower tax bracket this year and expect your income tax rate to increase in the future, you may want to consider a Roth IRA conversion. You can convert all or part of your pre-tax retirement account into a Roth IRA and pay the taxes now at a lower rate. The funds in your Roth IRA will continue to grow tax free, and you will have more income flexibility in retirement.

Charitable Donation

If you are charitably inclined, you should plan your donations in advance to ensure you maximize the tax benefits. For those over age 70.5, you may want to consider Qualified Charitable Distribution (QCD), where you can transfer up to $100K from your IRA to a charity. This method not only reduces your Required Minimum Distribution (RMD), but the distribution is also excluded from your taxable income.

Tax Bracket Management

The IRS uses a progressive tax system which means as your income grows, it is subject to a higher tax rate. Therefore, it is important to know in which of the seven federal tax brackets you will fall into. In your high-income years, you may want to reduce your tax liability by increasing your retirement contribution or utilize a tax-loss harvesting strategy. On the other hand, in low-income years, you may want to consider Roth IRA conversions, accelerate income recognition, or postpone deductible expenses.

Tax planning should be part of every individual investor’s financial and retirement plan. There are many strategies available for individuals and business owners, but it requires proper planning throughout the year. If you’d like to learn more about tax planning strategies unique to your personal circumstances, feel free to Talk With Us!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Crystal Kessler, CFP®, Wealth Advisor/Financial Planner

Proposition 19 limits property tax increases for seniors, disabled persons, and disaster victims needing to replace their home, and limits property tax increases on transferring family homes used as primary residences. Proposition 19 or The Home Protection for Seniors, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters Act was built off the passage of Proposition 13 back in 1978. Prop 13 limited the amount of property taxes to 1% of a property’s assessed value and capped any increase for assessments at 2% a year. Prop 13 only allows property to be reassessed at market value if there is a change in ownership or new construction. Now with Prop 19, it allows a primary residence’s taxable value to transfer as is to:

1. Individuals over age 55, severely disabled, and disaster victims to transfer their “taxable value” of their primary residence ANYWHERE in the state of California to a replacement residence. However, there are stipulations that apply which will be explained below.
2. A transfer of a family home or family farm between parents and their children if the property continues to be a family home. The child must live in the home as their primary residence and meet a value test, explained below.
3. A transfer of a family home or farm between grandparent’s and their grandchildren with the same stipulations for transfers between parents and children and the value test, but to qualify for this transfer the parents of the grandchild must be deceased.

For seniors over age 55, severely disabled persons, and disaster victims to transfer their original taxable value, the replacement residence or newly constructed residence must meet certain requirements:

• Replacement residence must be purchased within 2 years of the sale of the original home.
• Original and replacement property must be eligible for the homeowners’ or disabled veterans’ exemption meaning one must occupy the property as their primary residence.
• An application must be filed to transfer the owners’ current taxable value to the replacement residence.
• For disaster victims and severely disabled, they can be of any age, but the above requirements still apply.
• For disaster victims, the damage must be from a wildfire, or a Governor declared disaster.

Important Note: There is no limit to the market value for the replacement property compared to the original primary residence, but the replacement property market value amount above the original primary residence market value is added to the transferred taxable value.

Example: Joe and Susie ages 60 and 61, living in Los Angeles want to move closer to their children in San Diego now that they are retired. Joe and Susie bought their home in 2001 when their original taxable value was $300,000. Over the years their primary residence has grown to be $1 million, but due to Prop 13 their property taxes have been capped on increasing and being reassessed at the properties market value. Now that they are moving, Prop 19 will allow them to transfer their current taxable value of their original property to the replacement property.

1. If the market value of the replacement property’s value is more than the market value of the original primary residence, then the excess amount will be added to the taxable value when transferred. Meaning, if Joe and Susie find their replacement property is over $1,000,000 (what their current home’s fair market value is) and for example purposes we will say the replacement property is $1,100,000, they will have to add the difference of the $100,000 to their taxable value. Therefore, the taxable value of the replacement property will be $400,000 (original tax value transferred, $300,000, plus the excess market value of the replacement property, $100,000).
2. However, if the replacement property’s market value is less than or equal to the market value of their current primary residence, then the taxable value will transfer to the replacement residence with no adjustment needed. Meaning, if Joe and Susie find their replacement property is $1,000,000 or less then they will transfer their current property tax values from their original home of $300,000 to the new primary residence due to Prop 19.

For transfers between parents and children, and grandparents and grandchildren the rules work a little differently. To qualify and transfer the original taxable value of the parents or grandparent:

• The home must be eligible for the homeowners and disabled veteran’s exemption with the exemption applied for within one year of transfer or purchase.
• The assessed value of the new home when purchased or transferred must meet a value test. The value limit equates to the parents or grandparents’ taxable value at time of transfer plus $1 million. Any amount over the value test limit is added to the taxable value for the child or grandchild.
• The child or grandchildren are required to maintain the home as their primary residence for the remainder of their life.  If they turn the property into a rental or live in another home, that will trigger a tax reassessment on the property creating larger property taxes.

Example for value test:  Lauren and her daughter Lisa live together in Los Angeles. Lauren bought their home in 2000 when her original taxable value was $200,000. Due to Prop 13 Lauren’s property taxes have been capped on increasing and being reassessed at the properties market value. Lauren wants to transfer the home to her daughter Lisa. Prop 19 will allow them to transfer Lauren’s current taxable value of her property to Lisa if it passes the value test. The original taxable value of Lauren’s property, $200,000, is referred to as the Factor Based Year Value (FBYV). Prop 19 allows for the value limit to equal the FBYV of $200,000 plus $1 million dollars.

1. Over the years, the market value of Lisa’s home has increased to $900,000. Since the market value is under the value limit of $1.2 million ($200,000 FBYV + $1,000,000), Lisa will receive the original taxable value as Lauren with no additional property taxes.
2. Let’s say the market value increased to $1.3 million. Since the value limit is $1.2 million, Lisa will have to add the difference of $100,000 ($1.3 million – the value limit of $1.2 million) to the original taxable value. Thus, the new taxable value for Lisa would be $300,000 ($200,000 original taxable value + $100,000 difference).

As you can see, the benefits of Prop. 13 and Prop. 19 play hand in hand and are great for many California taxpayers, and especially advantageous for seniors, severely disabled, disaster victims.

Prop 19 replaced Proposition 58, which provided a more favorable transfer of real estate from parent to child. The changes are more restrictive for gifting property to children and grandchildren (i.e., primary residence requirement, value test, and non-primary residence elimination). 

If you own a home in California with a low tax basis and would like to keep the property in the family, talk with us and your estate planning attorney. If you would like to contact us, please speak with your advisor or you can reach us at financialplanning@bfsg.com.  

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.