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Gift Laws and Tax Implications in Utah

Gift Laws and Tax Implications in Utah

Gift Laws and Tax Implications in Utah

Everyone loves gifts, but did you know that if you gift a large sum of money you might need to pay a federal gift tax? Before gifting money, you must understand the federal tax laws to ensure you’re following all gift tax guidelines set by the Internal Revenue Service (IRS).

AA Tax & Accounting Services has compiled a guide to help you navigate gift tax for Utah residents — keep reading to learn more.

What Is Gift Tax?

The gift tax is a federal tax that is applied to money or property that is gifted to another person for nothing in return. It also applies to transfers where the gift giver receives less than the full value in return.

You may be wondering why you’ve never heard of this or paid a gift tax — it doesn’t apply to all gifts. If your gift or inheritance meets the set criteria, the IRS can collect a tax if you’ve already exceeded the annual or lifetime gift exemptions. So what are these exemptions? Let’s find out.

When Is a Gift Tax Applied?

As of 2020, the annual exclusion is set to a gift of at least $15,000 in a single calendar year — this number increases to $30,000 if a couple is gifting money from joint accounts or assets. Additionally, there is a cap on the amount a person can be gifted within their lifetime. This lifetime exclusion was raised to $11.58 million in 2020.

If your gifts are valued at or above these thresholds, you will need to report it to the IRS. Any gift of money or assets under these amounts are excluded from gift taxes.

Gift Tax for Utah Homeowners

If you live in Utah, there is no inheritance tax. But that doesn’t mean you’re always off the hook when it comes to paying taxes. If you are gifted something in an inheritance from a person who lives in a state other than Utah, there might be an inheritance tax applied to out-of-state inheritors. This varies from state to state, so you must take the time to understand inheritance laws if you inherit money or assets above the specified threshold from someone who lives outside of Utah.

Similarly, Utah also doesn’t have a gift tax. You will follow the same federal exclusions of $15,000 per individual — if you receive a gift at or above this amount you will need to report it to the IRS. While you won’t pay tax on the specified amount, the gift will reduce your lifetime exemption of $11.18 million.

Tax Consulting Services in Cedar City, Utah

There’s no reason to stress out about receiving a gift or inheritance. If you have questions about reporting a gift over $15,000 to the Internal Revenue Service, AA Tax & Accounting Services can help you navigate the process and walk you through everything you need to know.

The AA Tax & Accounting Services team is committed to helping you feel confident come tax season. Contact us to schedule an appointment.

Personal & Business Tax Changes To Expect If Joe Biden Takes Office

Personal and Business Tax Changes To Expect If Joe Biden Takes Office

With November 3rd on the horizon, the deadline to cast your vote in the presidential election is nearly here. Democratic presidential nominee, Joe Biden, has shared his tax policy proposals that will impact both business owners and individuals. As a way to raise federal revenue by $3.2 billion, Biden focuses on getting more taxes from both the wealthy and big corporations.

AA Tax & Accounting is here to inform you of some of the biggest proposed tax changes, not to sway you on your presidential vote. Let’s take a deeper look at how Biden’s plans will impact individual taxes and business taxes so you can have a well-rounded picture when casting your ballot on election day.

Individual Tax Changes

Although everyone will likely see some tax changes in 2021 based on Biden’s proposed tax plan, the most impacted will be wealthier Americans.

Taxes Remain Steady for Incomes Below $400,000
Under Biden’s proposed tax plan, households with an annual income under $400,000 shouldn’t see the amount they pay in taxes change. While middle-income families’ taxes will typically remain steady, there are a few instances where they could end up paying more.

One way individuals could end up paying more is through Biden’s proposed reinstatement of Obamacare’s mandate penalty for not having insurance. If health insurance isn’t purchased, the penalty would be an additional tax. Another way households might find themselves paying more in taxes is because of corporate tax increases. This will directly impact those owning stocks.

Adjustments for the Top 1% of Taxpayers
While middle-income families are mostly in the clear for tax increases, high-income households will likely take the burden of the proposed tax plan. In fact, Americans in the top 1% of households would see an after-tax income decrease of 16%—averaging a tax increase of $265,640.

Cap Deductions for Wealthy Taxpayers
For taxpayers that earn less than $400,000, they’ll be able to take the full value of itemized deductions. Households earning more than the $400,000 threshold will have the value of itemized deductions capped at 28%.

Capital Gains Taxed as Income
This proposed tax change has the largest impact on investors — especially those who have large investments in the stock and bond markets. When investors currently sell a share, they’re taxed differently than income. Under Biden’s plan, these gains would be treated like standard income.

As a result, any capital gains earned annually would be added as a form of income similar to salary and bonuses. This means that if individuals currently earn a lot of money through capital gains, they could find themselves with a big increase in their taxes.

Business Tax Changes

Businesses tend to take the brunt of the impact of Biden’s proposed business tax changes.

Increase the Corporate Tax Rate to 28%
The current tax rate for corporations is 21%. Under Biden, he is proposing the tax rate is increased to 28%—a pretty big jump in size. While there is a chance that tax increases get passed down to consumers through raised prices and labor, the increase in corporate tax rates shouldn’t impact the consumer much.

Set a Corporate Tax Minimum
In the past, large corporations like Amazon have been able to find ways to not pay taxes through various loopholes. However, Biden’s proposed tax plan ensures that all companies, no matter the scenario, will pay a minimum of 15% on all reported profits.

Tax Foreign Profits at 21%
One of the most drastic changes to tax rates impacts corporations and is related to foreign profits. Any money that is earned by foreign arms will have its tax doubled from 10.5% to 21%.

Tax Consulting Services in Cedar City, Utah

With proposed tax changes right around the corner, it can be overwhelming wondering what to expect. As you run into scenarios that may affect your taxes, you might decide that you’d like a tax consultant on your side to walk you through everything you need to know.

The AA Tax & Accounting Services team is committed to maximizing our clients’ tax savings and helping you feel confident come tax season. Contact us to schedule an appointment.

Important Tax Info For Multi-Family Properties

Important Tax Info For Multi Family Properties

As a residential property investor, it’s important to take advantage of tax benefits when possible to ensure you’re boosting your bottom line. Paying taxes is a must and can be quite costly, which is why there are many tricks to minimize the obligations surrounding multi-family home taxes.

Let’s explore the different ways that real estate investors can make reductions to the amount of property taxes owed on their multi-family homes.

Real Estate Depreciation Tax

Real estate depreciation is based on the principle that a rental property’s value declines over time due to wear and tear on the home. Think about it like a car’s value. As soon as the car comes off the lot, the quality and value begin to diminish. However, the home’s value is not usually decreasing because of factors like maintenance, renovations, neighborhood popularity, and market demand — which is why real estate depreciation is often referred to as a “phantom” expense for investors.

Because of real estate depreciation, the IRS allows investors to take a tax deduction based on the estimated decrease in the value of the multi-family property. This means that the investors can actually have a positive cash flow from the multi-family property, but shows a tax loss on paper — offering investors a major tax break.

How to Calculate Real Estate Depreciation

The IRS believes that a residential property is only useful for 27.5 years. This means that investors are able to deduct a depreciation expense from their taxes. Calculating your multi-family property’s depreciation amount is relatively simple and requires you to divide the property’s value by 27.5.

As an example, let’s look at a multi-family property worth $750,000. When dividing it’s value by 27.5, you will calculate a depreciation expense of $27,272.

Factoring that depreciation expense into your taxable income illustrates just how much an investor will save. Consider that your multi-family property generates $100,000 per year. This means you would have the following tax obligations:

Taxes owed without depreciation = $100,000 x 25% (federal income tax) = $25,000
Taxes owed with depreciation = ($100,000 – $27,272) x 25% = $18,182

With no other deductions other than a real estate depreciation tax, investors in this scenario would save $6,818 annually — which is massive tax savings of property taxes for multi-family homes!

Cost-Segregation

Similar to real estate depreciation, there is another tax benefit known as cost-segregation which also factors in the depreciation of elements within the multi-family property. This includes elements such as appliances, fixtures, and cabinets.

Unlike the home itself, these items within the home have a much shorter lifespan which can be written off taxes for no more than seven years.

One important thing to note when considering cost-segregation is that the more you use this on your annual taxes, the higher your tax bill will be upon selling the property. If you plan to sell the property and want to reduce taxes during the sale, be mindful of this tax benefit for multi-family homes in Utah.

Tax Deductions

As a residential real estate investor, you must take advantage of various tax deductions. In layman’s terms, a tax deduction is any type of expense that can be written off of your taxable income. With your multi-family home taxes, you have the ability to deduct any expenses incurred while managing, maintaining, or repairing your property from the total taxable rental income.

Consider writing off the following expenses you might incur with your multi-family property:

  • Property management costs
  • Maintenance or repair fees
  • Monthly utilities (water, gas, electric, etc.)
  • Property marketing costs
  • Mortgage interest
  • And more!

Investors of multi-family properties can really benefit from tax deductions (as well as depreciation and cost-segregation) in comparison to single-family investments. When filing property taxes for multi-family homes, you can pay a single tax bill that covers all the units within the property — making it more efficient to file and likely offers a higher rate than that of a single-family home.

The AA Tax & Accounting Services team is committed to maximizing our clients’ tax savings. Our full-service accounting firm has spent years serving Cedar City, Utah, and surrounding Southern Utah towns providing effective tax strategies for multi-family investors. Contact us to schedule an appointment.

Tax Lessons You Should Know About RobinHood And Other Stock Apps

Tax Lessons You Should Know About RobinHood And Other Stock Apps

Filing taxes is a complicated process. Now imagine adding stocks bought and sold in apps like RobinHood to your mix. This article explores some of the benefits and pitfalls of stock apps like RobinHood. It will also help you understand how you can streamline the process of obtaining “Robinhood taxes” with a tax accountant.

Sweep down from the forest. Obtain the evil King’s money and save the day by helping the poor. That’s what Robinhood did.

Like many stock apps, RobinHood offers you the promise of “Robinhood taxes.” That is, saving yourself from paying high taxes on stocks. But how much of this is true? Read on to find out about the history of stock apps like RobinHood and their pros and cons.

The RobinHood Stock App

Stock websites have existed since the 1990s and are very popular. The reason that the RobinHood stock app, as well as others like it, are popular is due to a certain number of reasons.

The Benefits of app like Robinhood

  • With the RobinHood app, you don’t need to pay any fees for trading or for commissions. Typically, other apps or software would require you to pay some sort of fee. RobinHood does this all for free.
  • At the end of the year, RobinHood helps you by providing a 1099 tax form. The 1099 is a form for income made outside of ordinary wages.
  • The RobinHood app is very convenient and promises to help you lower your taxes at the end of the year.

As you can guess, stock apps are one way that you can get your foot into the door of buying and selling stocks. It makes it easier to track and monitor while providing you with the simplicity of an app. However, there are many pitfalls to using these apps that need to be mentioned.

The Pitfalls of Using Stock Apps Like RobinHood

  • Filing taxes, as was mentioned before, is not an easy process. It’s easy for these apps to make mistakes. For example, the app considers all stocks and sometimes might encourage you to sell a stock that would incur more taxes. This is because you don’t get to choose which stock is sold. So, if you’re not careful or aren’t very informed about this, you might be paying more taxes than you would have been had you not used the app.
  • There are different tax requirements based on your tax bracket. You need to know where you fall so that you know how much taxes to pay based on your stocks.
  • The 1099 does account for the taxes that should have been taken out. You will need to take the taxes that should have been taken out normally on your own. So, you may end up needing to pay Robinhood taxes for having made profit.

Streamline the Process and Save Yourself Some Time

While there are many benefits to the RobinHood app and other stock apps, it’s important to simplify filing your taxes. One way that you can avoid the flaws associated with the stock apps while still getting to use them for their benefit is by having a consultation with a tax accountant.
Some of the benefit of consulting with the tax account include:

  • Knowing how to take out the taxes that were not taken out of the 1099 tax form.
  • Getting advice on which stocks would help you decrease the taxes that you’d need to pay.
  • Avoid getting audited by having an expert view your forms before submitting them.

So, yes, you can still have your cake and eat it too! Enjoy the benefits of stock apps, but avoid the pitfalls. Have an expert, like AA Tax & Accounting Services help you!

How to Deal with Tax Liens

How to Deal with Tax Liens
As Benjamin Franklin famously said over 200 years ago, “nothing is certain but death and taxes.” Even today, this quote still rings true. While countless Americans have tried to avoid paying their taxes, everyone must pay in the end.

But what happens when you neglect to pay taxes? The IRS has many tools in their arsenal, but the most common in this situation would be a tax lien.

What Exactly is a Tax Lien?

A tax lien is a judgment filed by the Tax Commission against a taxpayer’s real or personal property when they neglect or refuse to pay a Utah tax balance. This lawful claim against your property safeguards a taxing organization’s interest in your possessions.

This lien does not take the property away from you, it simply means that the government is securing your property against any debts you might owe. Typically, they are only filed after multiple attempts by the taxing agency to collect the taxes owed.

Tax authorities are not required to go through the court to impose a tax lien. If a taxpayer does not pay what they owe, the government may take the liberty to unload the asset(s).

Utah is a tax lien state: if any individual or business fails to pay their Utah state taxes, the Utah State Tax Commission (USTC) may file a tax lien. Any taxpayer that owes taxes may have a lien filed against them in Utah if they fail to pay or show a good faith effort of repayment.

What is a Tax Levy?

A tax levy is a legal seizure of your property to satisfy a tax debt. A tax levy is a bit more severe than a tax lien, working as an ultimate choice to collect money where traditional approaches have been unsuccessful. The execution of a tax levy is when the government exercises the rights secured by a tax lien.

A few possessions that may be taken to fulfill your debt include property or real estate, various finances from personal accounts, current or future wages, and vehicles. The federal government can also commandeer your federal and state income tax refund checks as well.

The IRS and the Utah State Tax Commission have the right to levy up to 100 percent of any asset that you or your business may own to collect on your tax debt. Similar to a lien, the tax authority does not need to go through a court to levy your property.

How a Tax Lien Can Affect You

A tax lien can have a significant negative impact on your financial well-being and overall health. A tax lien is considered to be a public filing. So, anyone who conducts a search on you or your business can see that a tax lien has been filing against you, including the sum owed and the assets affected.

Tax liens also appear on consumer credit as well as business credit reports. A lien can impact your credit score, making it significantly more difficult for you to qualify for a credit card or loan.

A tax lien that is filed against your business or your home can make it more difficult for you to sell a particular property. Property buyers will very often conduct a search for any tax liens and will often refuse to make an offer until the lien has been withdrawn.

How to Avoid a Tax Lien

The easiest way to avoid receiving a tax lien is to continually pay your taxes. If you happen to be remiss on your taxes, it is recommended to contact a tax accountant to receive help in dealing with your unique situation.

Perhaps the most detrimental action you can take would be to ignore communications from the IRS or USTC. If you owe taxes towards these agencies, it is best to take a proactive approach towards dealing with the situation. Taxing agencies, above all, just want to settle the dispute by being paid what they are owed.

It is important to be realistic about what you can pay. If you are having trouble budgeting or agreeing upon a particular amount, it may be advisable to contact a tax consultant.

What if I Need Help with my Tax Lien?

Receiving a Notice of Lien can be a very stressful thing for most people. The good news is that help is readily available.

While talking to the IRS or USTC may be daunting or stressful, having someone in your corner can turn the tide of this important financial dispute.

Contact a trusted Cedar City UT, tax accountant today to help with tax liens or levies.

Small Business Planning During Uncertain Future Markets

Small Business Planning During Uncertain Future Markets
The COVID-19 outbreak has negatively affected countless people around the world, and small business owners are no exception. In addition to causing many businesses to shut down or significantly reduce their in-person operations, the outbreak has also disrupted supply chains, has forced layoffs, and has sparked myriad other issues. Regardless of what you believe should be done in response to the virus, there is one thing that remains universally clear: the virus itself has created a tremendous amount of uncertainty.

In the small business world, uncertainty can create a host of new challenges. If a restaurant doesn’t know whether it will be able to serve food next week, doing things such as placing delivery orders and managing payroll will all become much more difficult. These businesses can be both overprepared and underprepared, both of which can result in glaring inefficiencies.

Planning for the future is something that today’s best accounting firms already know is challenging, but the extreme volatility we’ve already witnessed in 2020 has made this task even harder. However, even keeping these things in mind, there are still quite a few things all small business owners can do to help them weather these uncertain times and even prepare themselves to thrive.

Take Advantage of All Government Programs and Tax Deductions

Following the outbreak, the government has created a series of programs to help small businesses, including the CARES Act, the Economic Injury Disaster Relief, the Paycheck Protection Program (PPP), and many others. Additionally, the government has also reduced disaster tax deductions, some tax deferment options, and even some debt-forgiveness programs. Navigating these programs can be challenging and, in some cases, the window to apply for support may be very limited. Be sure to have a small business accountant that can not only help you adapt to these changes but also adequately (and legally) take advantage of these new laws.

Give Yourself an Opportunity to Scale

In a world that is plagued with uncertainty, it can be very difficult to know where your small business will be one year or even one month from. If you were to run 10,000 different simulations, some of them would likely move your business in a positive direction, whereas others would move your business in a negative direction. Naturally, you’ll want to put yourself in a position where you adequately adjust to all likely scenarios, meaning that scalability should be at the forefront of your mind. Hiring scalable outsourced partners—such as accountants, lawyers, marketers, and even labor that all work on an as-needed basis—will make it much easier to adapt as new market conditions unfold. Creating conditional contracts (we will deliver x product if y event occurs) can also help reduce your exposure to the risk of uncertainty.

Take Advantage of Unexpected Opportunities

There is no denying that the COVID-19 outbreak has had a negative impact on the economy. But when things become undervalued, this means that those who are able (and willing) to take action will quickly find themselves finding unexpected opportunities. For example, the outbreak has pushed already low mortgage interest rates lower, meaning that the risk of investing in real estate has been widely reduced. Additionally, many banks—particularly those that partner with the SBA—are also expanding their lending pools and creating some easier paths to capital. Furthermore, with many people suddenly unemployed, the labor pool has been flooded with new talent. While your business may be hesitant to make any major commitments during times of uncertainty, expanding your operations appears to be more affordable than ever before.

Consider Permanently Cutting Certain Expenses

When many small businesses, even including brick-and-mortar retailers, were forced to suddenly shift to a work-from-home or digital model, they were worried things would never be the same. But some owners were surprised to find that their new model was just as productive—or even more productive—than their old ways of doing business. If cutting back on infrastructure, physical locations, full-time staff, and other expenses does not seem to have a direct effect on your end product, then you may want to consider carrying these “temporary” changes forward.

Conclusion

The business world is full of uncertainty and this simple fact of life is clearer than ever before. But even though times are tough and future conditions are uncertain, there are still many ways to prepare yourself to continue moving towards its long-term goals. With a holistic approach, a willingness to adapt, and the ability to spot new opportunities, 2020 can still be a great year for many business owners.

Contact us to learn more about how your business can keep moving forward.

The Basics of Foreign Earnings and Taxes

The Basics of Foreign Earnings and Taxes
In this highly globalized era, more people are working remotely—many in foreign countries—than ever before. Working abroad can provide many advantages including allowing your enterprise to expand into new markets and allowing you to experience a new culture. However, as most people working abroad will quickly discover, working in a foreign country can provide some tax and legal complications.

One of the primary concerns of people working overseas is whether they will be subject to double taxation. According to today’s leading tax experts, the answer, to put it simply, is it depends. Below, we will discuss the most important things to know about being taxed while working abroad.

Does the United States Tax Income Earned in Foreign Countries?

To understand how you will be taxed while working abroad, you will first need to determine whether you qualify for the foreign earned income exclusion. According to the IRS, in addition to earning foreign income and having a “tax home” that is in a foreign country (meaning you are subject to this country’s tax codes), you must either be a resident of the country “for an uninterrupted period that includes an entire tax year”, live in a country that has an income tax treaty with the United States (of which, there are many), or be a US citizen that lives in a foreign country for 330 full days within a year.

The IRS further explains that “If you are a US Citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($107,600 for 2020). In addition, you can exclude or deduct certain foreign housing amounts.”

In other words, while foreign earnings will be subject to US tax law, the deductions (if you qualify) are rather generous. If you are unsure whether you qualify or whether you are subject to double taxation, consider speaking directly with your tax accountant. Furthermore, if you believe your earnings will be above the stated amount, you may want to consider speaking with both an American accountant, along with an accountant in the country you’ll be living in.

What Other Income Tax Rules Apply to Americans Living Abroad?

Generally speaking, money that is earned in foreign countries can be considered “foreign income.” The IRS defines foreign income as “wages, salaries, professional fees, or other amounts paid to you for personal services rendered by you.” But, as you might expect, there are many variables that can complicate this situation.

There are many types of income that, even if you are living abroad when the income is received, do not qualify as foreign income. This includes income earned by all military personal or civilian employees of the US Government, incomes earned in international waters and airspace, income received during the tax year after services were rendered, compensation that could be excluded from income taxes at home, and compensation that comes from social security and other annuities. Each of these cash flows will all be treated as if they were accrued in the United States.

Conclusion

Generally speaking, income earned abroad by American citizens will be subject to American tax law. But be sure to see if you qualify for the foreign earned income exclusion, along with the many deductibles and other exceptions currently available. While these situations can sometimes be rather complicated, it is still quite possible for many people to earn an income abroad without being subject to double taxation.

Interested in learning more about how income earned abroad is taxed? Be sure to contact us, here.

How To Steer Clear Of An Audit

How To Steer Clear Of An Audit
Nobody wants an IRS audit, whether on an individual basis or as a business owner. However, there are some things that can trigger an audit more easily, ranging from overestimating the value of your charitable contributions to simply forgetting to sign paperwork.

To help you steer clear of an IRS audit, our experienced accountant here at AA Tax & Accounting Services has some tips for you to implement.

Form LLC If Self-Employed

For those who are self-employed, forming a corporation—particularly an LLC—can help protect you, as the IRS is more likely to audit the self-employed and small businesses. With an LLC or other form of a corporation, you reduce your tax liability and become eligible for business deductions.

Should you need assistance with incorporating, our accountant can guide you through the process and recommend which type of business structure best suits your business.

Check For Any And All Mathematical Errors On Your Taxes

Even as most tax filers have moved away from paper tax forms and electronic forms are less liable to allow math errors, these mistakes can still crop up. Whether the error is a forgotten deduction or a shifted decimal point, it can trigger an IRS audit.

To prevent mathematical errors from being submitted on your taxes, be sure to carefully review your taxes line-by-line before you file your return. Even if you opt for professional tax preparation, take the time to ensure everything looks right.

Have An Accountant Prepare And Submit Your Tax Return

Working with a tax consultant can help remove the majority of the common errors that people make while filing their own taxes. With an experienced tax consultant to input, review, and file your tax return, you can feel confident when your taxes are submitted to the IRS.

Also, here at AA Tax & Accounting Services, our accounting firm extends an audit promise. If your taxes are filed by our accountant, and an IRS audit comes up due to an error, we will provide free tax resolution services.

Avoid Overestimating Donation Value

If you opt for the new above-the-line cash charitable donation, it isn’t likely to set off an IRS deduction, as that kind of donation is clear-cut. However, if you choose to donate a noncash contribution and it is valued over $500, you can trigger an IRS audit.

For one thing, you will need to fill out Form 8283 for all noncash donations over $500 and may still have the IRS audit you. If your noncash donation is $5,000 or under, you will fill out Form 8283, Section A, and for noncash donations over $5,000, fill out Form 8283, Section B.

These types of donations are prone to abuse and simple overestimation, so you may want to prepare yourself for an audit if you deduct larger, noncash donations from your taxable income.

Review Tax Deductions And Credits Eligibility

Speaking of deductions and tax credits, having incorrect tax deductions and credits can cause the IRS to come and investigate. All tax credits and deductions have clear eligibility guidelines, and some of these deductions and credits can conflict with each other.

Our accountant can help guide you through what tax deductions and credits you are eligible for and appropriately apply them to your tax burden.

Be Sure To Sign Your Tax Return

Lastly, but importantly, you should make sure you sign your tax return. Most electronic filing options will not let you submit your tax return if it isn’t signed, but if you file by paper, you need to be sure that you have signed all the appropriate areas. Otherwise, you may have an IRS audit on your hands.

When you are ready to get your taxes in order with professional assistance, you can contact us to arrange a consultation with your local Cedar City accountant.

IRS Announces 2021 Changes to Health Savings Accounts

IRS Announces 2021 Changes to Health Savings Accounts
The pandemic-extended tax deadline may have come and gone, but that doesn’t mean you should stop planning for your financial future. As your local Cedar City tax advisor, we’re here to tell you that it’s never too early to prepare for your future financial security or the next tax season.

One way you can address both future financial prosperity and reduce your tax burden is by taking advantage of the new, higher limits on contributions to health savings accounts (HSAs).

IRS Raises Health Savings Account Contribution Limits

To clarify, a health savings account is a specialized savings account where you can save for future medical costs pre-tax. These medical costs can be as simple as paying for your prescription and over-the-counter medication or to help fund a future surgery.

Also, if you use your HSA to pay for approved medical needs, you will not be taxed on the money that is pulled from your HSA. However, if you withdraw the money first, then pay, you will be taxed the same as if you pulled money from a 401(k). So, not only do you get to contribute to an HSA tax-free, but you can spend money from your HSA tax-free, all while reducing your taxable income.

If that sounds attractive to you, then you should be excited for the new 2021 contribution changes to HSAs. Recently, the Internal Revenue Service (IRS) has announced higher contribution caps on health savings accounts. For someone contributing under individual coverage, you can contribute $3,600, and families can contribute up to $7,200. This increase was made to help adjust for inflation. Also, if you are over 55 years old or older, you can make an additional $1,000 contribution to your HSA. For families, the catch-up limit is $7,000, with $1,000 allotted per HSA family contributor.

Why Contribute More To An HSA

When possible, we like to advise our clients to take advantage of health savings accounts, as they offer triple tax benefits. Other reasons to contribute to an HSA are:

  • Business owners can save – An HSA can be offered as an employee benefit, which business owners can deduct from their taxes as a business expense.
  • Available to all types of employees – Self-employed individuals can also utilize some HSAs, though not all are available to those who are contractors, gig workers, or otherwise self-employed, so check carefully.
  • Can be used with Medicare – Once over 65, you can use an HSA to cover your Medicare insurance premiums.
  • Refund yourself – With a receipt, you can reimburse yourself from your HSA for medical expenses.
  • No time limit – You can spend your HSA funds when you need them, there is no time limit like flex savings accounts.

Determine Your Personal Saving Strategies With AA Tax & Accounting Services

To see if an HSA is right for your financial needs, you can always take advantage of our accounting services to meet with our accountant for tailored advice.

If you would like personalized advice on your finances, whether as an individual or business owner, please feel free to contact us today to set up a consultation with our experienced accountant.

First Time Parents? Here’s the Helpful Tax Info You Need to Know

First Time Parents - Here’s the Helpful Tax Info You Need to Know
Becoming a parent can be an incredibly rewarding adventure. But, as you might expect, the joys of parenting also come with quite a few challenges. In addition to budgeting for a new child, many new parents often wonder if—and how—they will be able to claim their child as a dependent.

Your status as a parent will have many financial implications, some of them will be frustrating or stressful, while others—such as the credits and deductions available—will be beneficial. Working with a tax expert will make it much easier to navigate these uncharted waters. If there is a child that depends on you for financial support, they will likely qualify as a dependent. However, there are some variables that can complicate this situation, such as age, your legal relationship to the child, and whether the child is responsible for covering any of their expenses. Before claiming the Child Tax Credit, be sure to check that they qualify.

Understanding the Child Tax Credit

In the United States, the most recent update to the Child Tax Credit (CTC) occurred in 2017. Following the passage of the Tax Cuts and Jobs Act (TCJA), parents could claim a $2,000 tax credit for each “qualifying” child. The tax credit is available to individuals earning up to $200,000 per year and joint filers earning up to $400,000 per year. Because the CTC is a tax credit, rather than a tax deduction, the CTC is applied to the total tax owed. If it is your first time taking advantage of the CTC, you may want to consider getting some outside help. Hiring a specialist to help you prepare your taxes is particularly recommended for anyone who has recently experienced a “status change”, such as marriage, divorce, a new job, and—of course—having children.

Who Qualifies for the Child Tax Credit?

When applying for the child tax credit, the first thing the IRS will consider is your relationship to the claimed dependent. According to the IRS, “To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepsister or a descendent of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child.”

Furthermore, the dependent will also need to be a US citizen, US national, or US resident alien. They will need to live with you for more than half of the taxable year, you will need to provide the majority of their financial support, and the child will need to be younger than 17 at the end of the taxable year (the most recent December 31st). While there are a few exceptions to these rules (see IRS Publication 972), these six tests (age, relationship, support, dependency, residence, and citizenship) will usually all need to be passed in order for someone to be considered a legal dependent.

Claiming Dependents in the Age of COVID-19

In response to the COVID-19 outbreak, Congress passed the “CARES Act”, which has been one of the most notable pieces of legislation of 2020. The comprehensive Act provides $1,200 to many individuals, along with $500 per each qualifying child. To claim this stimulus, an individual must have an adjusted gross income less than $75,000 for an individual, less than $112,500 for a head of household, and less than $150,000 for couples filing together. Following these limits, the benefit is phased down from $500 per child.

Due to the prolonged effects of the virus outbreak, there may be an additional stimulus package issued by the end of the year. While it is not clear whether this package will include direct stimulus (such as the CARES Act did), it is almost certain that the same dependent qualifications will be applied. However, as any experienced bookkeeper will tell you, all future unknowns come with some degree of risk. To help you prepare for future uncertainty, our tax and accounting services can help you develop a secure financial position, regardless of what the future has in store.

If you have not yet claimed or received the first round of stimulus, the IRS is still accepting new claims. For questions about claiming a child as a dependent or questions about financially adjusting to parenthood, in general, you can contact us here.

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