Health Savings Accounts (HSAs) in a Nutshell

Preface: “Do not save what is left after spending, but spend what is left after saving”. – Warren Buffett

Health Savings Accounts (HSAs) in a Nutshell

Credit: Benjamin Gelbart

A Health Savings Account (HSA) is a tax advantaged savings account available to taxpayers who participate in a High Deductible Health Plan (HDHP) and who are not enrolled in any other health insurance, including Medicare.

An HSA is an investment account similar to a retirement savings account or a college savings account. The money contributed to it is invested and the investments grow tax-free for the life of the account. Withdrawals from the account are also tax-free as long as they are used for the intended purpose of the account, which in the case of an HSA is qualified medical expenses.
Unlike money contributed to a Flexible Savings Accounts or cafeteria plan, funds in an HSA are never lost just because they are not used by a certain date.

While a taxpayer cannot open an HSA without having an HDHP, once money has been contributed to the HSA, it continues to be available for withdrawal and is tax-free if used for qualified medical expenses even after the taxpayer is no longer enrolled in the HDHP and is no longer eligible to make contributions. Nor is there any required minimum distribution. The funds may be used to cover qualified medical expenses originating at any date after the HSA was established and funded. HSAs can even be used to reimburse the taxpayer for expenses that have already been paid out of pocket.

The tax benefits of HSAs are threefold:
– Contributions are deducted from your taxable income.
– The contributions, once invested, grow tax-free.
– Withdrawals from the account are tax-free as long as they are used for qualified medical expenses.

HSAs come in two flavors: individual and family. The family HSA has a deductible, annual contribution limit, and annual withdrawal limit that are larger than those for an individual: For 2023:  Individual HSA
annual contribution limit $3,850 ($4,850 if age > 55) Deductible $1,500 withdrawal limit  $7,500.  Family HSA annual contribution limit $7,750 ($8,750 if age > 55)  Deductible $3,000 annual withdrawal limit $7,500.

Note that combined contributions of a married couple cannot exceed the family coverage limit.

Excess contributions are subject to an excise tax of 6%. This excise tax is avoided if the excess contribution is withdrawn before the end of the year. Non-qualified withdrawals are subject to ordinary income tax plus a 20% penalty. The penalty (but not the ordinary income tax) is waived for taxpayers who are disabled or are of age 65 or older.

Taxpayers who have an HDHP through their employer will usually have contributions to their HSA deducted automatically from their paychecks. The contributed amount will not be included in their taxable income. The total amount of contributions made in a tax year will appear on the taxpayer’s W-2 in Box 12 with the code “W.” Because this kind of contribution is done at the payroll level, it also reduces FICA (Social Security and Medicare) payroll tax.

Taxpayers may also make direct contributions to their HSAs, as long as the total amount of contributions does not exceed the annual limit. Direct contributions can then be deducted from taxable income at tax time.

Tax Strategy: Another way to contribute to an HSA is to roll over funds from an IRA. However, this can can be done only once in a taxpayer’s lifetime.

Weighing the Pros and Cons of Purchasing an Existing Business

Preface: “It’s fine to celebrate success but it is more important to heed the lessons of failure.”- Bill Gates

Weighing the Pros and Cons of Purchasing an Existing Business 

Credit: Jim McKinley

Entrepreneurship can be a challenging journey, but buying an existing business can be a shortcut to success. No matter how tempting it may be to start a new business from scratch, buying an existing business is often the best option for entrepreneurs who want to hit the ground running. However, it’s important to weigh the pros and cons before you make a decision. This guide shared by Sauder & Stoltzfus explores both sides of the coin. 

Pros of Buying an Existing Business 

Established Customer Bases 

One of the biggest advantages of buying an existing business is that it already has an established customer base. This means that you don’t have to spend time building your customer base from scratch. Established businesses have loyal customers who know and trust the brand. This can save you a lot of time and money on marketing and advertising. 

Established Brand You Can Build Upon 

Another advantage of buying an existing business is that it already has an established brand. This means that you don’t have to spend time and money creating a new brand identity. You can build upon the existing brand and make it even stronger. 

Learn From the Mistakes of Others 

Before buying a small business, thorough preparation is key to ensure success and longevity. Start by conducting a comprehensive due diligence process to understand the business’s financial health, competitive landscape, and potential growth opportunities. Understanding why do small businesses fail can provide valuable insights into common pitfalls to avoid. For instance, poor cash flow management, lack of market demand, and inadequate business planning are frequent reasons for failure. Additionally, consult with professionals such as lawyers, business brokers, and Sauder & Stoltzfus to ensure you’re making informed decisions. By taking these steps, you can position yourself for a successful transition into small business ownership. 

Infrastructure in Place to Get Started 

Buying an existing business also means that there is already infrastructure in place. This can make it much easier to get started. For example, the business may already have an office, equipment, and employees. This can save you time and money on setting up a new business. 

Easily Promote a Change in Ownership 

When you buy an existing business, you can easily promote the change in ownership by using online tools to create content marketing posts and share them online. There are many online resources available that can help you with the process. 

Cons of Buying an Existing Business 

Higher Upfront Cost 

One of the biggest disadvantages of buying an existing business is that it has a higher upfront cost. You will likely have to pay more than you would if you were starting a new business from scratch. However, buying an existing business can be more profitable in the long run. 

Unforeseen Liabilities That Can Impact Profitability 

Another disadvantage of buying an existing business is that there may be unforeseen liabilities that can impact profitability. For example, the business may have outstanding debts or legal issues that you are not aware of. Credit reporting can be helpful. It’s important to do your due diligence and thoroughly research the business before making a purchase. 

Limit Your Flexibility In Making Changes 

Buying an existing business also means that you may be limited in making changes. The business already has established policies and procedures that may be difficult to change. This can be frustrating for entrepreneurs who want to put their own stamp on the business. 

Buying an existing business can be a great way to become an entrepreneur. It can save you time and money, and give you a head start in building a successful business. However, it’s important to weigh the pros and cons before making a decision. Consider the existing customer base, established brand, infrastructure in place, and the opportunity to hone your skills while running the business. At the same time, be aware of the higher upfront cost, unforeseen liabilities, and limitations on making changes. With careful consideration, you can make an informed decision that’s right for you and your business. 

Meals and Entertainment Deductions for Businesses in Tax Year 2023

Preface: “Entertainment is in the eye of the beholder.” – Anonymous

Meals and Entertainment Deductions for Businesses in Tax Year 2023

Credit: Benjamin Gelbart

For the most part, tax year 2023 sees a continuation of the types of meals and entertainment deductions allowed under the Tax Cuts and Jobs Act of 2017. This means:

I) No deductions are allowed for entertainment expenses.
II) In general, meal expense deductions are limited to 50% of their cost.

The 100% deductions that had been allowed in 2021-2022 for meals purchased in restaurants have now been discontinued. This increased percentage had been introduced as part of the Consolidated Appropriations Act of 2021 to help support the restaurant business during COVID by encouraging businesses to spend more of their meal budgets in restaurants.

The increased percentage still applies to meals that were purchased in restaurants during 2021-2022, but the 50% limit is back in effect for meals purchased in 2023 and going forward.

The only meals that remain 100% deductible for 2023 are:

a) Office holiday parties and picnics.
b) Food offered to the public for free.
c) Meals that have been included as taxable compensation to an employee                 or contractor.
d)Meals sold to a client or customer.

Transportation to and from client business meals is 100% deductible as it is a transportation deduction and not a meal deduction.
The 50% limit applies to:

– Client business meals.
– Meals provided at entertainment or sporting events.
– Meals provided for the convenience of the employer.
– Meals provided to employees occasionally and overtime employee meals.
– Meals during business travel.
– Meals in office during meetings and conferences.
– Meals included in a charitable sports package.

Example: Whether you are entertaining clients, providing a meal for employees during an extended series of meetings, or having a meal on the road while travelling for business, the meal will only be deductible at 50% of its cost regardless of whether you purchase the food at a restaurant or at a convenience or grocery store.

No deduction is available for entertainment, sporting event tickets, or club memberships. However, food and beverages provided during such events are still deductible up to the 50% limit as long as the cost is stated on a bill or receipt separately from the total entertainment cost.

Example: You entertain clients at a sporting event or club at your expense. During the event, food and beverages are provided. If your purchase for the food/beverage cost is stately on a bill or receipt separately from the other costs, you can deduct 50% of that separately stated amount that is due to food and beverages. That is the only business deduction you can take from an event of this type in 2023.

For more information on Meals and Entertainment Deductions for Businesses in Tax Year 2023 please contact our office.

The PA EITC Allows Pennsylvanians to Fund Schools and Reduce Taxes

Preface: “An investment in knowledge pays the best interest.” —Benjamin Franklin

The PA EITC Allows Pennsylvanians to Fund Schools and Reduce Taxes

Credit:  Jacob M. Dietz

Many people do not like paying taxes. Some people, however, would joyfully donate to a good school that shared their values. Fortunately, the Pennsylvania Educational Improvement Tax Credit (EITC) allows qualifying businesses to enjoy a 90% tax credit to reduce various PA taxes on eligible donations to qualifying organizations.

The credit offsets PA corporate net income tax, PA personal income tax and various other taxes. For pass-through entities, REV-1123 can be filed to pass the credit down to the partners to claim on their personal tax returns. It does not offset sales tax or payroll taxes. Sole proprietorships do not qualify for the credit.

If your business structure does not qualify, or if you do not wish to give through your business, then you might consider using a special purpose entity (SPE) to make contributions. Faith Builders offers the opportunity to give through an SPE.

To be a qualified member of an SPE, you must be either:
1. An owner or partial owner of a PA business (not a sole proprietorship)
2. A W-2 employee of a PA for-profit business OR
3. A stockholder of a PA registered business.

The donor must give to an approved organization to get the credit. Pennsylvania’s Department of Community and Economic Development lists many organizations that can receive these donations. Faith Builders Scholarship Services is one of these organizations. They pass the donation on to the school of your choice, less an administrative fee. Before choosing a school, however, check with the school to make sure that they are willing to accept the donation.

How much is the credit worth? Generally, EITC donors receive 75% of the contribution as a credit, but it is increased to 90% if you agree to a two-year commitment to give. For Pre-Kindergarten Scholarship organizations, the credit is 100% for the first $10,000, and then 90% above that but not exceeding $200,000.

Let’s look at an example of how this could work. Suppose James and Kevin are both 50% members in Ironville Bicycle Seats, LLC. They ask their CPA what their normal PA personal income tax liabilities are, and he tells them that they both averaged a $3,000 liability for each of the last two years. They decide to estimate their future liabilities on the low side to avoid having an unusable credit. They agree to aim for a $1,800 credit per person each year. They therefore make a 2-year commitment from the LLC to give $4,000 to Faith Builders Scholarship Services, and have the money passed on to their local church school. They fill out the information and give it to Faith Builders, which electronically files the application at the right time. Since it is a 2-year commitment, 90% of the donation, or $3,600 per year, is available as a credit. Their CPA can file REV-1123 to pass an $1,800 credit down to both James and Kevin each year to be used on their personal income tax returns. Their church school doesn’t need to worry about receiving a check from the state because the money received by the school doesn’t come from the state. The money never touched the state’s coffers on its way to fund Christian education.

Now let’s suppose that Kevin and James are still 50% partners, but James wants to take the EITC because he has children in a school that accepts EITC funds, but Kevin does not want to participate since his church school doesn’t accept EITC funds. In that case, James could still apply for the EITC by applying to Faith Builders to join an SPE in his personal name. He could then contribute $3,000 (or more) and get a $2,700 PA tax credit.
If you currently pay personal PA income taxes and already joyfully give to Christian education, then you may want to consider the EITC. The EITC allows Pennsylvanians to give to education while paying less to the government.

This article is general in nature, and does not contain legal advice. Please contact your accountant to see what applies in your specific situation.

2023 Tax Planning: Higher Education Credits

Preface: It’s what you learn after you know it all that counts. -John Wooden

2023 Tax Planning: Higher Education Credits

With school back in session, parents and students should look into tax credits that can help with the cost of college education. Credits reduce the amount of tax someone owes on their tax return. If the credit reduces tax to less than zero, the taxpayer may receive a refund.

There are two credits available to help taxpayers offset the costs of college education. The American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) may reduce the amount of income tax owed. Taxpayers who pay for higher education can see these tax savings when they file their tax returns next year.

 The American opportunity tax credit is:

        • Worth a maximum benefit up to $2,500 per eligible student.
        • Only for the first four years at an eligible college or vocational school.
        • For students pursuing a degree or other recognized education credential.
        • Partially refundable. This means if the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.

The lifetime learning credit is:

        • Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.
        • Available for all years of postsecondary education and for courses to acquire or improve job skills.
        • Available for an unlimited number of tax years.

To be eligible to claim the American opportunity tax credit, or the lifetime learning credit, a taxpayer or a dependent must receive a Form 1098-T from an eligible educational institution. The credits are subject to income limits: to claim the full amount, income must be below $80,000 for single taxpayers ($160,000 married filing jointly). Taxpayers cannot claim either credit if income exceeds $90,000 ($180,000 married filing jointly).

In general, qualified tuition and related expenses for the education tax credits include tuition and required fees for the enrollment or attendance at eligible post-secondary educational institutions (including colleges, universities and trade schools). The expenses paid during the tax year must be for: an academic period that begins in the same tax year or an academic period that begins in the first three months of the following tax year. For the AOTC but not the LLC, qualified tuition and related expenses include amounts paid for books, supplies and equipment needed for a course of study.

 The following expenses do not qualify for the AOTC or the LLC:

        • Room and board
        • Transportation
        • Insurance
        • Medical expenses
        • Student fees, unless required as a condition of enrollment or attendance
        • Expenses paid with tax-free educational assistance
        • Expenses used for any other tax deduction, credit or educational benefit

We wish you a successful school year. Please call our office if you have any questions related to education expenses and tax benefits.

Interest – Tax Breaks for Home Mortgage Interest

Preface: “You are not buying a house, you are buying a lifestyle.”                        -Anonymous

Interest – Tax Breaks for Home Mortgage Interest

The Trump Administration Tax Cuts and Jobs Act (Tax Cuts Act) placed new restrictions on the home mortgage interest deduction, one of the most important tax breaks available for homeowners today. Because the potential for tax savings is so great, it may be useful to review the rules. As you’ll see, they are quite complex and full of nuances as well as opportunities.

Home acquisition. Like the vast majority of Americans, you generally can fully deduct the interest paid on a loan if the proceeds are used to buy or build a residence (a main home and one vacation home). This type of financing is called acquisition debt; it can’t exceed an aggregate of $1 million for all interest to be deductible, and must be secured by your home.

Under the Tax Cuts Act, a taxpayer may treat no more than $750,000 as acquisition debt ($375,000 in the case of married taxpayers filing separately) for tax years 2018 through 2025. The reduced amounts for acquisition debt do not apply to any debt incurred on or before December 15, 2017. Therefore, a taxpayer who purchased their home on or before December 15, 2017, may continue to deduct interest paid on the first $1 million of debt ($500,000 for a married taxpayer filing a separate return). The acquisition debt incurred on or before December 15, 2017, reduces the $750,000/$375,000 limit to any acquisition debt incurred after December 15, 2017.

Points. In general, any points you pay to the lender in the year you get a mortgage loan to buy your main residence are fully deductible. In order for points to be deductible, they must be paid from funds separate from loan principal at the time of closing. Points paid to refinance a mortgage on a principal residence are generally not deductible in the year paid and must be prorated over the period of the new loan. However, if the borrower uses part of the refinanced mortgage proceeds to improve his or her principal residence, the points attributable to the improvement are deductible in the year paid.

Home equity loans. The Tax Cuts Act suspends the deduction for interest on home equity debt. Therefore, for tax years beginning after December 31, 2017, a taxpayer may not claim a deduction for interest on home equity debt. However, home equity loan interest is still deductible in certain circumstances. For example, interest on a home equity loan used to build an addition to an existing home would be deductible if certain requirements are met. The suspension ends for tax years beginning after December 31, 2025.

RefinanceIt may be beneficial to refinance acquisition debt for a lower rate of interest (or more favorable terms overall). The ($1million/$500,000) higher dollar limit continues to apply to any debt incurred after December 15, 2017, if it used to refinance existing acquisition debt as long as the refinancing does not exceed the amount of the refinanced debt. Therefore, the maximum dollar amount that may be treated as acquisition debt on the taxpayer’s principal residence will not decrease by reason of a refinancing. The exception for refinancing existing acquisition will not apply after:

        1. the expiration of the term of the original debt; or
        2. the earlier of the expiration of the first refinancing of the debt or 30 years after the date of the first refinancing.

Please do not hesitate to give us a call and set up an appointment to analyze your home financing situation in order to make the most of the home mortgage interest deduction.

Charitable Giving – Gifts of Appreciated Property

Preface: “Those who are happiest are those who do the most for others.” – Booker T. Washington

Charitable Giving – Gifts of Appreciated Property

Tax complications, apart from questions of proof, do not ordinarily arise when you make a cash gift to a charity. However, complications can and do arise when you make a gift of appreciated property.

Appreciated property is property that has a current fair market value that is higher than your tax basis in the property. Basis is the yardstick for measuring gain or loss and usually is the original amount you paid for the property. However, special basis rules apply for inherited property, property acquired by gift, and property for which depreciation deductions are allowable, such as property used in a trade or business.

Your charitable deduction will depend on whether the appreciated property is ordinary income property or capital gain property. Ordinary income property includes business inventory and a capital asset, for example stock held for investment, that you owned for one year or less. Capital gain property includes capital assets that you owned for more than one year as well as certain real and depreciable property used in a business.

In general, your deduction for ordinary income property is limited to your basis. For example, you bought stock five months ago for $5,000. It’s now worth $8,000. An immediate contribution of the stock would give you a deduction of $5,000, not $8,000. Now suppose you bought the stock more than one year ago for $5,000 and again contribute it when it’s worth $8,000. Here, you normally would be able to deduct the full $8,000. In either case, you would not be taxed on the $3,000 in appreciation. That is a far better result than if you sold the stock, paid tax on the gain, and contributed the remaining proceeds to charity.

Unfortunately, not all contributions of appreciated capital gain property give you a deduction for the full value of the property even if held for more than one year. Your deduction is limited to basis when you contribute tangible personal property that is put to an unrelated use by the charity. For example, if you contributed a painting to a hospital and the hospital used it for display, the use of the painting would be unrelated to the hospital’s charitable purpose and your deduction would be limited to basis. On the other hand, a painting contributed to a museum and used for display by it would not be an unrelated use and your deduction would not be limited.

Special percentage limitations also come into play. If the property qualifies as capital gain property and it is real estate or stock, your deduction generally is limited to 30 percent of your adjusted gross income unless you make a special election.

As you can see, contributions of appreciated property to charities are a bit more complicated than run of the mill cash contributions. Also, the rules for contributions to private charities are somewhat different. If you have any questions about a contemplated contribution of appreciated property, please contact us so for a consultation to maximize the tax benefits of your generosity.

Guidance on Employee Use of Cell Phones

Preface: “It used to be that we imagined that our mobile phones would be for us to talk to each other. Now, our mobile phones are there to talk to us.” ~ Sherry Turkle

Guidance on Employee Use of Cell Phones

The Internal Revenue Service has issued guidance designed to clarify the tax treatment of employer-provided cell phones.

The guidance, issued as an IRS Notice, relates to a provision in the Small Business Jobs Act of 2010 that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.

The guidance on the treatment of employer-provided cell phones as an excludible fringe benefit provides that when an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.

Simultaneously with the Notice, the IRS announced in a memo to its examiners a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for non-compensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as nontaxable. This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages.

Under the guidance issued, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related; as such arrangements are generally taxable.

If you have any questions regarding the use of cell phones or the tax treatment of other fringe benefits, please call our office at your  convenience.

 

 

Independent Contractors v. Employees – An Update

Preface: A problem is the chance for you to do your best. – Duke Ellington

Independent Contractors v. Employees – An Update

Worker classification is a hotly contested audit issue that has caused anxiety for business owners all across the country. Whether a worker is classified as an employee or as an independent contractor can mean a substantial difference in the amount of employment taxes that the business pays. In addition, the new health care reform law imposes health care coverage requirements on an employer with more than 50 full-time employees, a fact which may tempt many employers to hire independent contractors instead. It is one thing to legitimately employ an independent contractor. However, an employer who misclassifies his employees either inadvertently or deliberately to minimize its employment tax or health care coverage responsibilities, may become subject to interest, penalties and tax liens. Such measures can bankrupt an otherwise successful business.

A business that is not currently under audit for employment taxes, but that wishes to correct its workers’ classification, may choose to enter the Voluntary Classification Settlement Program (VCSP). The IRS opened the program in 2011, and it is still in effect. Eligible businesses that enter the program are required to pay only 10 percent of the employment taxes that would have otherwise been due for the most recent tax year. In addition, there would be no interest or penalties, and the IRS would not conduct an employment tax audit of the business.

Additionally, the IRS has a voluntary settlement program to resolve worker classification issues called Classification Settlement Program (CSP).  This allows businesses and tax examiners to resolve worker classification cases as early in the administrative process as possible, thereby reducing taxpayer burden. In the CSP, examiners can offer a business under audit a worker classification settlement using a standard closing agreement developed for this purpose. The CSP procedures also ensure that the taxpayer relief provisions are properly applied. The IRS opened the program in March 1996. A taxpayer declining to accept a settlement offer retains all rights to administrative appeal that exist under the Service’s current IRS procedures and all existing rights to judicial review.

In light of the IRS’s predominantly pro-taxpayer initiatives, you may want to re-examine your worker classifications at this time. Even when potential employment tax liabilities are not overwhelming, it’s important to remember that misclassification can also cause pension plan difficulties. If you have discovered a misclassification and wish to determine whether you are eligible to participate in the VCSP, please do not hesitate to call our office for more information.

2023 Tax Planning: Benefits of Lowering Adjusted Gross Income

Preface: Life is really simple, but men insist on making it complicated. – Confucius

2023 Tax Planning: Benefits of Lowering Adjusted Gross Income

Effective tax planning to reduce your income can reduce your overall tax burden. Individual taxpayers may be able to reduce their taxable income through deductions if they meet the qualifications and income limitations. Saving for retirement and for future medical costs is an important way for an individual may achieve financial security and prepare to save for future expenses. This letter focuses on the background and tax benefits on reducing adjusted gross income by contributing to retirement plans, contributing to a health savings account, and opportunities for a student loan interest deduction.

 Traditional IRA. Any individual, regardless of whether or not covered under other qualified retirement plans, can establish an individual retirement account (IRA). Whether an individual is employed or self-employed, they may also take advantage of a variety of employer-sponsored retirement plans. These options not only provide security for the future, but also may provide opportunities for current tax savings. Traditional IRAs allow an individual with earned income to make tax-deductible contributions to a savings plan under which the gains and earnings are not taxed until they are distributed.

 Contributions to a traditional IRA are generally deductible on the taxpayer’s individual income tax return, to the extent that they do not exceed the lesser of the individual’s compensation for the year or the maximum contribution limit for the year and subject to income limits. In addition, nondeductible contributions from after-tax income may be made to traditional IRAs.  For 2023, total contributions to all of a taxpayer’s traditional and Roth IRAs cannot be more than the lesser of $6,500 ($7,500 if they are age 50 or older) or their taxable compensation for the year. The prior maximum age limitation of 70 ½ to contribute to an IRA ended effective for contributions after December 31, 2019.

 SEP PlanA SEP is a type of IRA for small business owners or self-employed individuals. A SEP IRA allows the employer to make contributions to the accounts set up for employees. Self-employed individuals choosing a SEP must include all employees who satisfy the following requirements: at least 21 years of age; were employed during any three of the preceding five years; and earned at least $750 in the current year.

 Contributions to a SEP plan are tax-deductible and earnings are not taxable until withdrawal. One advantage of the SEP IRA is the higher contribution limit. For 2023, employers can contribute the lesser of up to 25% of income (limited to $330,000) or $66,000.

 SIMPLE Plan. Any employer that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year can establish a SIMPLE IRA plan. Self-employed individuals who received earned income from the taxpayer and leased employees are taken into account for purposes of the 100-employee limitation.

Employers must also make contributions whether or not an employee elects to defer a portion of their income to the plan. Contributions are tax deductible and investments grow tax deferred until the owner is ready to make withdrawals in retirement. For 2023 an employee may defer up to $15,500. If the individual age 50 or over, there is a $3,500 catch up contribution allowed, for a total of $19,000.

 Health Savings Account (HSA). Health savings accounts (HSAs) are available for individuals who have a high deductible health plan and may be funded by the individual or the individual’s employer. The benefits of an HSA include:

        • taxpayers can claim a tax deduction for contributions you or someone other than your employer make to your HSA,
        • contributions to your HSA made by your employer may be excludable from income, and
        • the contributions remain in your account until you use them.

 For 2023, the maximum contribution to an HSA is the lesser of: the annual deductible under the individual’s high deductible health plan; or $3,850 for an individual with self-only coverage and $7,750 for an individual with family coverage.

Student loan interest deduction. Interest paid by an individual taxpayer during the tax year on any qualified education loan is deductible from gross income in calculating adjusted gross income. The student loan must be incurred by the taxpayer solely to pay qualified higher education expenses. The maximum deductible amount of interest is $2,500, but the deduction is phased out or reduced based on the taxpayer’s modified adjusted gross income.

If you’d like to evaluate the tax advantages of retirement plans, health savings account, or education benefits could apply to your individual income tax situation – please call us at your earliest convenience to review potential tax plans for you to reduce your 2023 taxable income or tax liability.