Helpful Tips to Minimize Personal Taxes

Yes, You Can Minimize Your Personal Taxes

Every year, people like you pay too much in taxes. In most cases, the reason is lack of knowledge. There are many opportunities to decrease your tax liability and minimize your personal taxes, but if you don’t know they exist, how can you use them to your advantage?

The place to start is by understanding which opportunities are available to you. Do your earnings come from an employer? Self-employment? Both? Is there something you love doing which could be turned into a side hustle, or even a full-time business? The choices you make affect the tax saving opportunities available to you.

Tax Saving Opportunities For Employees

As an employee, your employer might offer you the opportunity to contribute pre-tax dollars into a Flexible Spending Account (FSA), Health Savings Account (HSA), or 401(k) account. By doing so, you reduce the taxable income reported on your W-2, which translates into a lower Adjusted Gross Income (AGI). Your AGI is the starting point for calculating your taxes. The lower your AGI, the less taxes you must pay.

By contributing to an FSA, you get to use pre-tax dollars to pay certain medical and dental expenses not covered by your insurance. Expenses included are:

  • Deductibles
  • Co-pays
  • Prescriptions
  • Over-the-counter medications prescribed by your doctor
  • Certain medical equipment

You get to contribute up to $2,850 per employer in 2022 but there’s a catch. You have to use at least $2,250 no later than 2 1/2 months after the end of the year, but you are allowed to carry up to $570 over into the next year.

If you have a high-deductible, Marketplace health plan, you might prefer to contribute to an HSA plan, if your employer offers you the option. Because these plans mean higher out-of-pocket expenses, you’re allowed to set aside more pre-tax dollars. For 2022, you can contribute up to $3,650 for individual, and $7,300 for families. You even get to contribute an extra $1,000 if you’re 55 or older.

Unlike an FSA, HSA’s have no provision requiring you to use the funds by a certain date, or risk losing part of your contributions. Instead, any funds remaining at the end of the year can be rolled over indefinitely. However, you can only choose this option if you have a high-deductible health plan.

Maximize Your Retirement, Minimize Your Taxes

Whether you’re an employee, business owner, or self-employed, maximizing contributions to your retirement account can not only lower your taxes in the current year, but help you provide for your own future. As an employee, the most common, elective option is a 401(k) plan.

Essentially, you contribute part of your salary to the plan. Like an FSA or HSA, the dollars are pre-tax, and the taxable income reported on your W-2 excludes your contributions. Though contributing to a 401(k) plan doesn’t protect you from paying taxes indefinitely, it can postpone your liability until after you’ve retired, and taxable income is lower.

Not only are you saving for your own future, but you can defer taxes on up to $20,500 for a 401(k) plan, or $14,000 for a SIMPLE 401(k) plan. If you are over 50, you’re also allowed to make catch-up contributions, and defer an additional $6,500 to a 401(k) plan, or $3,000 to a SIMPLE 401(k) plan, but only if your employer’s plan allows catch-up contributions. Be aware these limits might be adjusted by the terms of the plan.

It’s important to understand the rules concerning excess contributions, especially if you contribute to plans with more than one employer. HKMP can review your contributions in case you need to take a distribution by the April 15th deadline, This can potentially minimize your personal taxes and/or avoid being double taxed.

Retirement Plan Options for the Self-Employed

According to this recent article, there are several options for self-employed individuals. The most common are:

  • Traditional IRA
  • Solo 401(k), aka one-participant 401(k)
  • SEP IRA

If you’re just starting your business, a Traditional IRA offers a couple of advantages;

  • Simple to set up
  • You can roll an employer’s 401(k) into it
  • Can be set up easily with an online brokerage

However, if your self-employment income is growing quickly, you might want to choose another option since your contributions are limited to $6,000, or $7,000 if you’re 50 or older.

Tax Advantages for Higher Limit Plans

If your business is established, and enjoys higher earnings, a solo 401(k) might be a better option because it’s higher limits allow you defer more otherwise taxable income. You’re eligible if you’re self-employed, or a business owner with no employees other than a spouse. You can contribute to the plan:

  • As an employee, up to $20,500, plus $6,000 catch-up contributions, if applicable, or 100% of your salary,  whichever is less
  • For an employer, up to 25% of compensation except:
    • A sole proprietor or single owner LLC, up to 25% of net self-employment income
    • Net self-employment income for purposes of this calculation is net profit less half your self-employment tax, and the plan contributions you made for yourself.

If you are also contributing to an employer’s 401(k) plan, be aware your contribution limits apply to all plans in which you participate. Make sure you review your contributions to all plans as you may be double-taxed on any excess contributions.

Keep it Simple With a SEP IRA

As a business owner, or self-employed individual with either no, or a few employees, you can choose a SEP IRA.  Some advantages of a SEP IRA versus a solo 401(k) are:

  • No IRS reporting requirements
  • Allows you to make contributions for your employees
  • You can deduct the lesser of your contributions or 25% of net self-employment earnings, or compensation subject to certain limitations discussed below
  • Can be opened with an online broker like you would a traditional IRA

Possible disadvantages include:

  • No catch up contributions
  • You must contribute an equal percentage of salary for each eligible employee including yourself

Both a solo 401(k) and a SEP IRA are subject to the same compensation limits used to calculate your contribution. For 2022, the limit is $305,000.

Let HKMP help you make an informed decision, so you choose the plan which best fits your needs, both now, and as your business continues to grow. Allowing you to minimize your personal taxes and use that money elsewhere.

5 Questions All Leaders Should Ask To Assess Cybersecurity Risk

The Cost of a Data Breach

A study conducted by IBM last year, The 2020 Cost of a Data Breach Report, put a price tag on data breaches. According to the study, the average cost of a data breach is $3.86 million. Also, 80 percent of data breaches resulted in the exposure of customers’ personally identifiable information, which is the most expensive type of breach to remedy.

Stolen or compromised employee credentials and cloud misconfigurations are the most common causes of data breaches, with 40 percent of breaches caused by these incidences. Misconfigured cloud networks increased data breach costs by half-a-million dollars, according to the study.

Cybersecurity Starts at the Top

Statistics like these make it clear that cybersecurity should be an important part of every organization’s operating plan. Ensuring a well-protected network starts at the top.

Here are five key questions leadership should ask to assess cybersecurity risk:

Question #1: Is your executive leadership informed about cyber risks that threaten the company?

Cybersecurity is about managing risk. A breach can have dire consequences. This makes managing cybersecurity risk a critical part of an organization’s governance, risk management and business continuity framework. Early response actions can limit or even prevent possible damage. Accordingly, timely reporting to leadership should be built into the strategic framework for managing the enterprise. The CEO, CIO, business leaders, continuity planners, system operators, general counsel and public affairs should be part of the chain of communications.

Question #2: What is our exposure to cyber risk, the potential impact of a breach and our plan for addressing both?

Identifying critical assets and associated impacts from cyber threats is critical to understanding your specific risk exposure. These will most likely be a combination of financial, competitive, reputational ando/or regulatory risks. Risk assessment results are key to identifying and prioritizing specific protective measures, allocating resources, informing long-term investments and developing policies and strategies to manage cyber risks at an acceptable level.

Question #3: How does our cybersecurity program apply industry standards and best practices?

A comprehensive cybersecurity program leverages industry standards and best practices to protect systems, detect potential problems and enable timely response and recovery. Compliance requirements help to establish a good cybersecurity baseline to address known vulnerabilities. However, they do not adequately address new and dynamic threats or sophisticated adversaries. Using a risk-based approach to apply cybersecurity standards and practices allows for more comprehensive and cost-effective management of cyber risks than compliance activities alone.

Question #4: How many cyber incidents is normal for us? At what point should executive leadership be informed?

Executive engagement in defining the risk strategy and levels of acceptable cyber risk enables close alignment with the business needs of the organization. Regular communication between leaders and those held accountable for managing cyber risks provides awareness of current threats, security gaps and associated business impact. Analyzing, aggregating and integrating risk data from various sources and participating in threat information sharing with partners helps organizations identify and respond to incidents quickly. Ensuring that protective efforts are commensurate with risk.

A good way to establish updated security protocols is to have an assessment of your network. This can show you where you stand and provide insights to a solid plan of action.

Question #5: How comprehensive is our cyber incident response plan? How often is it tested?

Even a well-defended organization will experience a cyber incident at some point. When network defenses are penetrated, the leadership group should be prepared with a Plan B. Documented cyber incident response plans that are exercised regularly help enable timely response and minimize impacts.

Devise a Cybersecurity Plan Now

When it comes to cybercrime and data breaches, it’s not a question of if, but when. Now is the time to devise a plan for how your organization will deal with a data breach when one occurs.

Meet with your key leaders use the questions to assess cybersecurity risk. If you don’t have adequate answers, commit to doing whatever it takes to get answers before your organization is the victim of a data breach.

Succession Planning Strategies: 5 Questions to Ask Before Selling Your Business

1. What Are Your Post-Business Ownership Plans?

How much thought have you given to what you’re going to do after you sell your business? Maybe you plan to retire and take it easy for a while. If so, you should work closely with a professional wealth advisor to develop a detailed retirement financial plan to help ensure that you have sufficient resources to support your desired retirement lifestyle.

Or maybe you want to start another company after you sell your existing business. In this case, you’ll want to make sure that the proceeds from the sale of your business are sufficient to launch your new venture.

2. To Whom Will You Sell The Business?

Business buyers usually fall into one of two broad categories: internal buyers or external buyers. An internal buyer may be your existing employees or management team. In this case, the business sale could be conducted via an employee stock ownership plan (ESOP) or management buyout (MBO). Or it could be family members if yours is a family-run business.

There are two main types of external buyers: financial buyers and strategic buyers. Financial buyers, such as private equity groups, look for companies with high growth potential. This way, in the future, they can sell your company at a profit to reap a return on their investment. Strategic buyers, meanwhile, seek businesses whose products or services complement their own, such as a competitor. This kind of merger can help the buyer gain market share by acquiring your customer base and consolidating operations.

3. How Can You Add Value To The Business Before Putting It On The Market?

The best way to boost the eventual sale price of your business is to focus on key business value drivers today. These are things you can do now to make your business more valuable in the eyes of buyers while reducing potential risks.

For example, are your corporate records, contracts and other legal documents all current and in good standing? Are your financial statements accurate and current and is your technology up to date? Have you developed a seasoned and experienced management team that’s prepared, and financially incentivized, to help ensure a smooth transition to new ownership? Most importantly, is there a realistic business growth plan in place that will enable buyers to realize positive ROI on their investment?

4. How Much Is Your Business Worth?

This is the proverbial $64,000 question. Many owners think they have a good idea of what their business is worth based on their gut instinct. But this value often isn’t realistic. Most owners have an emotional connection to their business and tend to over-value the sweat equity they’ve put into building it.

Buyers will look at your business from a purely numbers and analytical approach. The main thing they’re looking at is the quality of business earnings and how repeatable these earnings are in the future. It might make sense to engage a valuation professional to conduct a quality of earnings study to estimate the future cash flow potential of the business and come up with at least a rough business valuation.

5. Who Will Form Your Business Advisory Team?

Selling a business is a lengthy and complex process that requires high-level expertise. You should begin forming a business advisory team that includes the following:

  • An investment banking firm to market your business.
  • A valuation professional to help you gauge business value and determine the selling price.
  • An experienced M&A attorney.
  • A Tax advisor
  • who specializes in the sale of closely held businesses.

Even if you’re not planning to sell anytime soon, it’s still smart to go ahead and start the succession planning for your business now. This way, you’ll be ahead of the game when you’re ready to exit the business one day down the road.