Use Cost Segregation To Your Advantage

Is Cost Segregation Right For You?

In our previous article entitled “Strategies to Minimize Tax Liability for Business Owners” we talked briefly about the advantages of using Cost Segregation to accelerate depreciation on certain portions of both residential, and commercial real property. In this article, we’ll take a look at how, and why it may work for you. Additionally, we will share what you need to do to take advantage of the potential benefits.

As a reminder, Cost Segregation is a means by which owners of property can break out certain aspects of a building, and treat them like personal property for depreciation purposes. This allows you to depreciate a portion of your commercial property over 5, 7, or 15 years, rather than the standard 39 for commercial, or 27.5 for residential.

While certain aspects, like landscaping are fairly simple to document and segregate, you’d miss out on a number of opportunities to take advantage of all available accelerated deductions if you didn’t dig a little deeper. That’s where hiring a construction engineer who is a cost segregation specialist can be well worth the investment.

When to Hire a Professional

A cost segregation specialist can differentiate between elements of the building which are defined as “dedicated, decorative, or removable” versus what’s considered “necessary and ordinary for operation and maintenance of the building”. Assets included in the building cost which may be treated as personal property for depreciation purposes may include:

  • Carpeting and flooring
  • Bathroom fixtures
  • Dedicated cooling systems for machinery
  • Electrical fixtures and lighting
  • Decorative finishes

If you spent more than $750,000 to purchase, or remodel a building since 1987; which for rental and other commercial property is easy to do, HKMP can help you engage a specialist to perform a detailed study to identify components in your building qualifying for cost segregation, and who will provide supporting documentation for your allocations. This can be extremely insightful if you acquired the property.

A cost-segregation specialist will analyze architectural drawings, mechanical and electrical plans, and other blueprints to break out those components eligible for treatment as personal property from those which are structural components of the building. As part of their analysis, they’ll also identify, and allocate things like architecture and engineering fees, and other indirect costs to each element.

Take Full Advantage of TCIA Changes

The Tax Cuts and Jobs Act of 2017 (TCIA) made it even more attractive to identify assets which qualify for Cost Segregation. TCIA increases bonus depreciation on qualifying assets from 50% to 100%. It also allows you to retroactively utilize cost segregation on previously owned properties acquired after September 27, 2017. Prior tax law only applied to new construction, and remodels.

Before 1996, retroactive savings on property added since 1987 had to be realized over 4 years. However, in 1996, the law changed. Thus allowing cost savings to be realized all at once, upon completion of the cost segregation report. Until TCIA was enacted, it only applied to new construction. Taking advantage of Cost Segregation now allows you to claim retroactive deductions for catch-up depreciation on older buildings acquired since September 27, 2017 which didn’t qualify for cost segregation prior to the enactment of TCIA. Additionally, you can claim all the savings in one tax year.

Weigh the Costs and Benefits

By utilizing your cost-segregation specialist’s report, HKMP can ensure you take advantage of every opportunity to reduce your tax liability by adjusting the timing on your depreciable assets.  Advantages include:

  • Increased cash flow in years when costs are higher
  • Revisiting properties purchased used which were previously ineligible for cost segregation
  • Identifying opportunities to take advantage of catch-up depreciation
  • Possible reduction to real estate taxes by shifting costs away from real property
  • Potential increase in deductions for sales and use tax
  • Documentation of your re-allocations in the event of IRS inquiries

Please keep in mind, when you’re re-allocating assets you’ve depreciated in prior years, you could create a liability for recaptured depreciation. This could trigger understatement penalties, especially if you’re overly aggressive in your use of cost segregation. Also, cost segregation reports do have a cost. Therefore, it’s a good idea to weigh the potential benefits before any study is done.

HKMP can help weigh the costs and benefits of reallocating assets identified in your cost segregation report. Allowing you to make informed and intelligent decisions, and reallocate costs for the best possible outcome.

Financial Benefits of Estate Planning

Estate Planning: Know Your Worth

Estate planning is an oft-overlooked, but no less important part of your overall financial plan. Although the primary goal is to protect your assets postmortem, there are also tax advantages you can use to minimize the amount of assets you use to pay taxes now, and in the future.

One of the most common misconceptions when it comes to estate planning, is it’s only necessary for large estates. Granted, unless the value of your estate exceeds $12.06 million for Federal purposes (though this is scheduled to revert back to $5.49  million in 2026), and $6.11 million for the State of New York, it’s exempt from estate taxes. But taxes are just the tip of the iceberg.

Make Sense of the Dollars and Cents

Knowing not only the components of your estate, but their values is crucial when you’re:

  • Drawing up a will, and allocating assets amongst your heirs
  • Determining how much life insurance to buy

First, you’ll want to make a list of all of your intangible assets, as these tend to be more valuable

  • Bank accounts (checking, savings, CD’s)
  • Brokerage accounts (stocks, bonds, mutual funds)
  • Life insurance policies
  • Retirement plans (IRA, 401(k), pension)
  • HSA’s
  • Ownership interest in any businesses

Second, you’ll want to make a list of your tangible assets: Homes, land, and real estate

  • Vehicles
  • Collectibles
  • Jewelry
  • Household goods including electronics, furniture, power tools, and equipment

You can either estimate the value of these items based on:

  • Recent appraisals or comps, or
  • How you expect your heirs to value them

HKMP is here to help. We can ensure tangible assets are valued accurately, taking current market trends and fluctuations into consideration.

Make sure you include a list of account numbers, contact numbers for the custodians, and the location of relevant documents for all intangible assets. You can utilize bank and brokerage statements, or current financial statements where applicable to determine their current value.

The Pluses and Minuses Matter

Third, create a list of your creditors, and the current amount of debt with each one, even if it’s zero. Like your intangible assets, these things tend to ebb and flow over time:

  • Loans
  • Mortgages
  • HELOCs
  • Credit cards

Again, list all account numbers, contact numbers for whoever holds the debt, and where the statements, contracts, credit cards, or check books are located.

Knowing the value of your estate can provide the information you need to purchase adequate life insurance sufficient to relieve your heirs of any debt attached to your assets, and ensures your will is as complete as possible.

Make Important Decisions Sooner Rather Than Later

This is also the time to make certain important decisions:

  • Assign an Estate Administrator
  • Give medical power of attorney to a trusted individual in the event you’re unable to speak for yourself
  • Assign durable financial power of attorney allowing someone to manage your financial affairs if you’re medically unable to do so. This can include paying bills and taxes, as well as allowing your designee to manage and access your assets.
  • Determine whether or not you want to create either a Revocable or Irrevocable Living Trust.
  • Identify your beneficiaries (or in some cases, identify exclusions)
  • Who gets what?
  • Who are your contingent beneficiaries?
  • Manage designees on accounts such as retirement, insurance, bank, and brokerage
  • Update as circumstances change

Give Your Estate Plan Regular Check-Ups

While there are many low-cost, DIY options available for both managing your estate, and drafting wills and trusts, it’s up to you to determine whether or not it’s in your best interests, and those of your heirs to incur the cost of an attorney and certified public accountant to ensure your assets and heirs are protected, and your wishes are properly documented. Factors affecting your decision may include:

  • The size of your estate
  • Whether your wishes and allocations are simple or complicated
  • If you have concerns for the care of minor children
  • The size, number, and complexity of business interests
  • If you have non-familial heirs

Above all, revisit your estate plan periodically. The one thing you can count on in life is change, and more often than not, changes impact your estate, not only in value, but in how you want it allocated, and whether you need to revise your will.

Certain changes should, by nature and impact, trigger a reassessment:

  • Change of circumstances (job change, marriage, divorce, economic fluctuations)
  • Change of beneficiaries (birth, death, marriage, divorce)
  • Changes in State or Federal laws

With upcoming changes in tax laws affecting estates, let HKMP give your Estate Plan a financial check-up to determine whether there’s a potential favorable, or unfavorable impact from new laws and limitations.

Rental Property and Qualified Business Income

Are You Maximizing Your QBI Deduction?

If you’ve invested in real property, you’re probably using every opportunity you can to offset the income with expenses, so you don’t eat up the property’s cash flow with taxes. But are you doing everything you can to minimize your liability? If you’re not taking advantage of the QBI (Qualified Business Income) deduction, not only are you missing out on an opportunity, but your tax bill is higher than it should be.

As an investor in rental property, you’re probably already aware of the usual, allowable deductions available to you such as:

  • Advertising
  • Telephone and Internet
  • Repairs and Maintenance
  • Utilities
  • Employees
  • Interest
  • Etc.

You might also be taking advantage of special depreciation options discussed in a recent article entitled “Strategies to Minimize Tax Liability for Business Owners” including:

  • Section 179
  • Bonus Depreciation
  • Cost Segregation

What the Tax Cut and Jobs Act (TCJA) Means to You

You can maximize your QBI deduction on property held for lease or rental by taking advantage of the 20% pass-through deduction available through section 199A, which was introduced as the TCJAof 2017? Section 199A allows owners of certain pass-through businesses to deduct part of their qualified business income from a qualified trade or business.

What this could mean to you is a deduction of up to 20% of qualified business income if your rental property is held by a qualified trade or business, and you meet certain thresholds. On September 24, 2019, Revenue Procedure 2019-38 added:

“…a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the qualified business income deduction under section 199A of the Internal Revenue Code (section 199A deduction).

Of course, you do have to meet certain requirements in order to qualify:

As such, the deduction isn’t available to:

  • C-Corps
  • Income earned as an employee providing services
  • On properties with triple-net leases

Not unlike many deductions, there are also income thresholds which as of 2021 were:

  • $329,800 for Married couples filing jointly
  • $164,900 for all others

and for 2022 will be:

  • $340,100 for Married couples filing jointly
  • $170,050 for all others

How the QBI Deduction Works

Calculation of the deduction involves 2 components:

  • QBI – 20% of QBI from a domestic business meeting the ownership criteria discussed above, subject to the following limitations:
    • 50% of W-2 wages paid to employees of the business.
    • Or 25% of wages paid to employees of the business plus 2.5% of unadjusted basis immediately after acquisition (UBIA) of qualified property held for trade or business

Like much of the IRS code, section 199A can be quite convoluted. There are limitations and qualifications which can be difficult to navigate successfully. Having someone like HKMP, with extensive knowledge and experience with the IRS tax code, can ensure you meet all necessary criteria, your deduction is calculated correctly, and you don’t miss out on every opportunity for potential tax savings.

Protect Your QBI Deduction. Cover All the Bases.

Qualifying for the safe harbor isn’t just about meeting requirements for a qualifying business or understanding the thresholds which limit the deduction. There are specific record-keeping requirements which must be met as well:

  • Maintain separate books and records reflecting income and expenses for each property
    • Owners of multiple properties can satisfy this requirement by preparing separate income and expense statements for each property before consolidating.
  • Investment enterprises in existence less than 4 years must have at least 250 hours of service performed by the taxpayer or others for:
    • Plumbing
    • Landscaping
    • Landlord-related duties such as
      • Repairs and maintenance
      • Rent collection
      • Application review
      • Time spent with tenants
  • Ensure a record of all services performed includes:
    • Hours
    • Description
    • Dates of service
    • Who performed the service

In addition, you must attach a statement to your tax return for every year you rely on the safe harbor.

Enlisting HKMP’s help can ensure you comply with all the safe harbor requirements, maximize your deduction, and avoid jeopardizing the deduction now, or in the future.

The Importance of an Annual Financial Review

If you’ve ever been through a financial audit, you know they are time consuming and exhausting. Not to mention expensive. What if you could reduce the possibility of needing audited financials? Fortunately, you can. The answer is an annual financial review. They are less time consuming, less costly, and take less time away from you and your staff’s day-to-day business.

As a business owner, you accepted an element of risk the day you decided to launch your business. Continually monitoring and managing that risk affects every decision you make; every relationship you form.

Though annual reviews can help reduce your need for an audit, there are times an audit may be unavoidable, such as:

  • Financing for business expansion
  • Compliance

If you’re talking to lenders or investors about funds for expansion, you can be certain they’ll want reasonable assurance you’re worth the risk.

Depending on the nature of your business, and the industry in which you operate, you may be required to provide regular, audited financial statements to a government regulator. When audited financials are required, the auditor’s opinion is the assurance needed to provide a high level of confidence your company’s financial statements and disclosures conform to generally accepted accounting principles (GAAP) in the United States of America are presented fairly, and are free from any pertinent misstatements. However, if none of this applies to you, you might want to opt for reviews rather than audits.

How is an Annual Financial Review Different from an Audit?

A review is an examination by a CPA, where the auditor evaluates financial data to provide moderate assurance that they are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with GAAP. Due to the limited scope, a review has significantly less impact on time spent by staff and management than an audit.

While an audit and a review differ in their scope, they both consist of a systematic examination of the inputs to the financial statements in order for the accountant to provide a report which will, hopefully, state that the financials are free of material misstatements, and are prepared in accordance with GAAP.

HKMP can help you determine if, and when your company requires an external review.

Choosing the Right People for the Job

Audits and reviews must be performed by an independent, outside CPA.

Not every CPA firm is qualified to perform an audit or review. When the time comes for you to invest in an audit, you’ll need a firm who is experienced in your industry and understands your business. Although it could be the same firm who performs other services for your company, they must be able to maintain a position of independence throughout the audit.

It’s also important you feel confident they have a solid reputation, qualifications, and staffing to perform the audit efficiently. You need to ensure you’re ready for the process to begin, and avoid unnecessary, and often costly delays.

HKMP has the knowledge, experience, and reputation to ensure both audits and reviews are performed professionally, and efficiently. As such, they can advise you as to which process best serves your needs.

Is Your Financial Plan Complete?

Protect Your Financial Future: Will and Life Insurance

In a recent post, (Personal Finance-Part 1, “Direct Your Personal Health Towards Prosperity”) we showed you how to monitor your financial health, and understand the various metrics which help you improve your current situation, and ensure a healthy financial future for you and your family. Awareness of your current status, an understanding of both personal and outside factors, and a solid plan are key components. But there’s more you can do to support your plan.

No personal financial plan would be complete without reviewing your will and life insurance periodically. Both are important when your goal is to expect the unexpected, and be prepared to weather changes which could threaten the financial health and well-being of both you, and your family.

Why You Need Life Insurance

You’re probably aware life insurance protects you and your family’s encumbered assets upon the death of the responsible parties. It ensures mortgages, loans, and credit card debt are paid upon your death so your heirs will not have to sell the house or liquidate other assets to satisfy your debts. Depending on the type of life insurance you choose, it may also cover final expenses such as:

  • Outstanding medical bills
  • Estate taxes
  • Funeral costs

Part of your financial planning process will be to determine which form of life insurance best suits your needs, and to review it regularly to ensure it continues to provide the best coverage possible. What may be the most reasonable option when you’re single, or your income is lower may not be the best choice when you’re married, have children, or own a business.

Consider these questions before making decisions about the type, and amount of insurance you need:

  • Is a spouse or children relying on you for financial support?
  • Do you want to cover the costs of final expenses?
  • Do you have a joint mortgage and/or significant debt?
  • Are you a business owner?

Choosing the Right Policy

There are two basic types of life insurance:

  • Term
  • Permanent

Term insurance is for a specific period of time, and only provides death benefits. It may be inexpensive at first, but when the term ends, typically in 10-15 years, rates will increase with each renewal, as it will be based upon your age at the time of renewal. You will also have to to a new medical examination. If your health has changed over the last 10-15 years, your new premiums will reflect this increased risk.

Permanent life insurance comes in three flavors:

  • Whole life
  • Universal
  • Variable

Whole life insurance has a set payout. Initially, premiums are usually higher than Universal or Variable policies but remain constant over your lifetime. The premium also contains a savings component, or cash value over time which:

  • Earns interest on a tax-deferred basis
  • Can be withdrawn or borrowed against for college tuition, home improvements, or retirement income.

Universal life insurance is a combination of two factors:

  1. A portion that pays your annual insurance premium, and offers some flexibility in both face value, and premiums. For example:
  • You may reduce, defer or increase annual Premium Payments without impacting the Face Value of the Policy and it will only affect your Cash Surrender Value
  • Death benefits can also be changed as your needs, or circumstances change. However, death benefits can be decreased but not increased. An increase would be subject to a new medical exam.
  • The excess over your annual insurance premium is invested in interest-based funds which earn money tax free, and add to the Cash Surrender Value of your policy.

Variable life insurance is a more recent take on Universal Life. The difference is, with Variable policies, the excess paid over the annual insurance premium is invested, income tax free, in stocks.

Regardless of the type of Life insurance you choose, upon your death, the proceeds will go to your estate. This increases the value of your estate. For example:

If you have a $5M estate, and $5M in Life insurance, your estate is now worth $10M. Depending on the size of your estate, and the value of your life insurance policy, your taxable estate could increase. There are other alternatives, which would allow your heirs to receive the insurance proceeds without resulting in adverse tax consequences.

HKMP’s advisors can help you navigate the pros and cons of life insurance options, and help you determine the payout and premium best aligned with your budget, circumstances, and financial plan.

Set Your Intentions With a Will

A will is often overlooked as part of the financial planning process, especially in your younger years. It’s your opportunity to make legally binding decisions while you still have a say in the matter. So why do you need a will?

  • A will is a legal document that spells out your wishes regarding the care of your children, as well as the distribution of your assets after your death.
  • Failure to prepare a will typically leaves decisions about your estate in the hands of judges or state officials, and may also cause family strife.

Don’t go blindly into preparing your will. It’s important you understand:

  • You can prepare a valid will yourself, but you should have the document witnessed to decrease the likelihood of successful challenges later.
  • To be completely sure everything is in order, consider having your will prepared by a trusts and estates attorney.
  • Health proxy’s and other matters should also be addressed by your attorney.
  • Both spouses should have executed wills. Provides consistency among other issues

HKMP is here to help you compile all assets which belong in your will, and where applicable, determine your share of those which are jointly owned.

Prep Tips to Simplify Your Business Taxes

Tax Preparedness

Whether you’re a seasoned pro, or it’s your first-time filing taxes for a business, there are commonalities in what your tax preparer will need to ensure your returns are complete and accurate. Using a checklist will not only save time, but will help your tax professional find all the deductions and credits to which you’re entitled, giving you the lowest possible tax bill. Who doesn’t want to simplify their business taxes and pay less?

First and foremost, you should already have some form of business accounting system in place, capable of tracking your transactions, and generating reports. If you’re just starting out and have a minimum number of transactions, you might be able to keep it simple, using a spreadsheet, or Quicken.

However, you’ll pay for the simplicity by having to migrate to something more robust as your business grows.  Options for sole proprietors, freelancers, and very small businesses include Fresh Books, and Wave, both of which are recommended by Investopedia, Nerd Wallet, and PC Magazine.

If you’re growing, and have, or intend to have payroll, you might prefer something that will grow with you. Top picks include Xero, Quickbooks Online, and Zoho. Prices, functionality, integration and available modules vary from one system to another. For best results, and to avoid the perils of migration sooner than necessary, let HKMP help you determine which system will suit your needs and your growth, and provide the best overall value.

Checklists Simplified

Once you’ve entered all transactions for the year into your chosen accounting system, you can prepare the following reports:

  • Income and Expense (aka P & L)
  • Balance Sheet
  • Statement of Cash Flows
  • Previous Year’s Tax Return

This will help your tax preparer determine where additional detail is needed. You can start by providing detail for the following areas:

  • Assets purchased, depreciated, or disposed of
  • Loans
  • Leases
  • Opening and closing inventory, if applicable
  • Stocks or bonds purchased or sold
  • Payroll reports

Much of this information will also be useful when  tax planning during Q4 of 2022.

Information about your loans may be a little trickier this year if you took advantage of the Paycheck Protection Program (PPP), or Economic Injury Disaster Loan Program (EIDL). Though they may be excluded from income, it’s important to report them accurately so you won’t pay unnecessary taxes on funds which helped keep your business afloat amidst the challenges imposed by COVID regulations.

Detail Made Easy

Other areas for which you might be asked to provide detail are:

  • Officers’ salaries (corporations)
  • Guaranteed payments to partners (partnerships)
  • Dividends received broken down by payer
  • Taxes and licenses
  • Professional fees
  • Interest
  • Charitable contributions

Most of the accounting programs mentioned can create schedules by payee which will satisfy your accountant’s needs. Make sure your detail includes the tax year for which your tax payments were made so any pre-payments are applied correctly.

Staying Tax Prep Ready

Tax preparation shouldn’t be something you ignore until it’s time to give your records to your tax accountant. There are a number of ways to stay ahead of the curve so your accountant can not only prepare your tax returns, but help you with tax planning before the year is over. Above all, they’ll help simplify your business tax information gathering process and the transmitting of required filings at tax time.

  • Adequate accounts for collection of costs and income (e.g. Officers’ Salaries and bonuses separate from Employees)
  • Maintain up-to-date schedules for:
  • Taxes and licenses
  • Depreciation
  • Stocks and bonds
  • Reconcile accounts at least quarterly, if not monthly

Keeping your books and records up to date will enable you to schedule a tax planning appointment during the fourth quarter. There are many opportunities to improve your tax position in both the current, and subsequent year. Don’t lose out on many tax saving strategies by failing to act before the end of the year.

Make HKMP your one-stop-shop for accounting, tax planning, and tax preparation.

Avoid Post-Divorce Tax Consequences

Chances are, your life plan did not include filing for divorce. When you said, “I do”, you believed wholeheartedly it was a promise you’d honor as long as you and your spouse were alive. Unfortunately, life happens, and people change. Some couples can weather the storms and evolve together. Others are not. What’s important now is to protect yourself and ensure your share of what you built together is kept as intact as possible. All while avoiding post-divorce tax consequences.

Whether your divorce is amicable, or contentious, you need to get all agreements and disclosures in writing. This is needed to protect yourself, and ensure you receive an equitable distribution of marital property. A Statement of Net Worth and determining your tax filing status until the divorce is final need to occur as soon as possible after the initial divorce filing.

Engaging your accountant to help you navigate the financial details will help you avoid confusion. Your accountant can help mitigate potential conflict over past and future tax liability, refunds, and personal versus marital property.

Ensure Property Distribution is Equitable

The Statement of Net Worth is a sworn statement outlining each person’s assets, liabilities, and income. It’s important to be both accurate, and entirely honest when completing this document. Falsified, or omitted information can be used against you if you and your spouse fail to reach an agreement on the distribution of marital property.

Absent an agreement, the court will decide how assets and liabilities are divided. Omissions or falsifications can result in a less favorable distribution for the person who signed an inaccurate, or incomplete Statement.

While New York is an equitable distribution State, there are still a few which follow community property rules. What this means to you is marital property will be distributed equitably rather than 50/50. Divorce.net offers a list of factors the court will consider when determining what constitutes an equitable distribution in the State of New York. Some of those factors are:

  • Yours and your spouse’s income and property when you married, and on the date you filed for divorce
  • Length of the marriage
  • Yours and your spouse’s age and health
  • Whether the custodial parent needs to live in the family home, and have use or ownership of its effects.
  • Tax consequences to each of you

Separate property is not subject to distribution, but it’s important to know what it is, and how to ensure your Statement of Net Worth reflects both distributable and non-distributable assets, and income.

The experts at HKMP can not only help protect your sole and separate assets, but ensure all marital income and assets are accurately reported before you sign the Statement of Net Worth.

avoid divorce tax consequences

Marital vs Separate Property

In the State of New York, marital property includes anything acquired during the marriage, regardless of who acquired it including:

  • Income earned during the marriage
  • Property purchased with said income
  • Property purchased while married
  • Each person’s retirement benefits earned while married
  • Appreciation of marital property while married

There are a few exceptions which allow property to be considered separate property including:

  • Property acquired before marriage
  • Property either spouse acquired from someone other than each other by gift or inheritance
  • Compensation for personal injuries
  • Property spelled out as personal property in a prenuptial agreement, or other written contract
  • Property acquired from the proceeds or appreciation of separate property insofar as the appreciation didn’t involve a contribution or effort by the other person

Allocation of a business owned prior to the marriage can bring its own set of challenges if it wasn’t addressed in a prenuptial agreement. Though value prior to the marriage is considered separate property, there are certain aspects which can be considered marital property, and subject to equitable distribution.

  • Marital funds transferred to the business
  • Labor contributed to the business by the non-owner spouse
  • Appreciation of the business during the marriage
  • Enhancements such as professional licenses, and education achieved during the marriage

Also, labor contributions by the owner-spouse will be considered when determining how to equitably distribute the business. As such, it’s important to ensure the business is valued accurately at both the beginning and end of the marriage, and that labor contributions by both spouses are valued appropriately.

Appreciation of the business may also be considered allocable. As some spouses may try to hide or deflate assets, especially in a closely held business, hiring a forensic accountant can help ensure all aspects of the marital portion of the business are included, and valued correctly.

Choose Your Tax Filing Status Wisely

Although it’s possible for an uncontested divorce to take as little as six months, it’s more likely yours will take a year or more from start to finish. As such you and your spouse must also agree on tax filing status until the divorce is final, in the event you are still legally married on December 31. You must both sign a document if you wish to submit your returns as Married, filing jointly. Otherwise, you must use the filing status:

  • Married filing separately, or
  • Head of Household

Your tax preparer is your best resource when determining which status will be in your best interests, as well as which spouse, if either, can file as Head of Household. Only when you file for legal separation instead of divorce, and it is approved by the court by December 31, can you file as Single instead of Married, filing separately.

If part of your settlement involves selling the family home, each person is entitled to deduct up to $250,000 for capital gains purposes. Timing of the sale can have a positive or negative impact on the exclusion. An informed decision will protect your share of the sale and help maximize your tax benefits.

HKMP can review your assets, liabilities, and income to help maximize your tax benefits. Thus enabling you to make the best decisions possible under challenging circumstances. Divorce is expensive, financially, and emotionally. The last thing you need to deal with are post-divorce tax consequences.

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.

Strategies To Minimize Tax Liability For Business Owners

As a business owner, you strive to run a profitable, thriving business. But you’re not in business to support the IRS, so how do you avoid paying more than your fair share? As in life, knowledge and information are your best defense, and your greatest assets for ensuring profits remain available for business expansion, including capital purchases, and increased staff.

By now, you’ve probably closed the books on 2021, and are setting your sights on a strong, profitable 2022. You still have time to take advantage of options to minimize your taxes for 2021, and implement tax efficient strategies for 2022.

Your first line of defense is to hire a knowledgeable accountant like HKMP who can help you navigate the muddy waters of the tax code, avoiding costly mistakes, and taking advantage of strategies to minimize your tax liability.

Make the Most of Depreciable Assets

If you’ve purchased tangible capital assets such as machinery, vehicles, computers, or cell phones, consider taking advantage of Bonus Depreciation and/or the Section 179 deduction. Both allow you to accelerate depreciation on new, or used equipment by deducting up to 100% of the cost in the year of purchase. You can also deduct up to 100% of a capital lease in the first year, although you spread the purchase price over multiple years.

Section 179 does contain certain limitations:

  • You must show a profit for the year
  • A maximum deduction of $1.05 million in 2021 and $1.08 million in 2022
  • Maximum equipment purchases of $2.62 million in 2021 and $2.7 million in 2022
  • Smart phones and laptops available for personal use have a 50% limit
  • Vehicles available for personal use have an $11,600 depreciation limit in the year purchased

Bonus depreciation gives you a little more leeway, especially since the limit increased from 50- to 100-percent in 2021. Be aware, the limit will begin decreasing in 2023, until it bottoms out at 20% in 2025. Also, if you take Bonus Depreciation on one asset in a class, you must use it for all assets in that class purchased in the same tax year. Here is where a conversation with your accountant is imperative so you take full advantage of the tax benefits.

Key advantages to using the section 179 deduction:

  • Flexibility
  • You can use all or part of an assets cost
  • Can be used for different classes of assets
  • Does not need to be used for all assets in a class
  • Can be used for Leasehold Improvements

Key advantages to using Bonus Depreciation:

  • You don’t have to show a profit for the year
  • No upper limit on purchases, or bonus depreciation claimed

Above all, you can use both the Section 179 deduction and Bonus depreciation in the same year. Just make sure you’re not applying both to the same asset.

There are other considerations affecting how and where you use Bonus Depreciation and the Section 179 deduction so it’s critical to discuss your options, and best course of action with your tax accountant. Some slippery slopes include:

  • Recapture rules
  • When you have to opt out of Bonus Depreciation
  • Section 179 ceilings on deductions and annual purchases
  • Changes in the allowable percentage of Bonus Depreciation after 2022

Now is the time to plan your future capital purchases, to ensure you’re taking full advantage of the tax savings both options offer.

Accelerating Depreciation on Real Estate

If you invest in real estate, you may want to consider cost segregation to help you pay little or no taxes on your investments. Cost Segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce both federal and state income taxes on their rental income.

By breaking down, and reclassifying certain interior and exterior components of a building to personal property or land improvements, you can take advantage of accelerated depreciation Instead of depreciating the entire building over 39 years for commercial property, or 27.5 for residential property, you can depreciate the portions you break out over 5, 7, or 15 years.

Let HKMP help you decide how best to apply these strategies to minimize your tax liability for 2021 and beyond. They can provide invaluable insight, so you optimize all available tax saving opportunities. They’ll guide you through the constantly changing landscape of tax law, helping you use those changes to your advantage, and avoid costly mistakes in the future.

Direct Your Personal Financial Health Towards Prosperity

Monitor Your Financial Health

Every year, you manage your health with an annual physical, eye exam, and diagnostic tests to monitor the wear and tear on your body and identify potential opportunities to strengthen and improve your overall health. Are you giving your financial health the same attention?

When it comes to your physical health, there are prescribed objectives based on your age, gender, and family history. Setting objectives for your personal finances is equally important, using similar factors. Are you financially healthy right now? To answer that, you need to measure where you are versus where you want and need to be to enjoy a healthy financial future.

Useful tools for monitoring financial health include:

  • Understanding Net Worth
  • Managing your Debt 
  • Monitoring Spending Habits
  • Understanding Market Trends and FICO Score
  • Life Changes and financial impact

These tools let you see whether you’re meeting your financial objectives. They help you identify what’s working, and where you need to improve. Now, let’s dig a little further into each tool.

Know Your Net Worth

Your net worth is the difference between total assets and total debt. This will vary based on a number of factors including where you are in your career, how recently you made a major purchase like a home, and market fluctuations. Also significant are marital status, and where you are in the cycle of life. Are you married or single? Of child-bearing age? Have or want children? Although these factors don’t directly impact net worth, they do contribute to present and future savings, investments, debt, and the amount and type of insurance you carry.

In order to fully assess your net worth, you should make two lists. List one is your assets:

  • Current value of your home
  • Cash assets
  • Investments
  • Other significant assets (vehicles, boats, vacation homes, etc.)

List two is your debts:

  • Mortgage balances
  • Loan balances
  • Credit card debt

Are You Managing Your Debt?

First, establish a baseline so you can track what’s working, and what isn’t, based on increases or decreases in net worth over time. Catching a downward trend early allows you to act sooner rather than later, to protect and strengthen your financial health. How?

Step 1, perform an annual review of:

  • Net Worth
  • Mortgage rates
  • Credit card interest rates

Step 2, compute your debt-to-income ratio by totaling monthly payments for:

  • Mortgages
  • Loans
  • Credit cards

Divide this total by your monthly gross income. While experts vary on what constitutes financial health, a debt to income ratio of 20-30% or less is a healthy goal. Though the numbers you use in this calculation only represent a moment in time, you can use them to determine how well you’re managing your debt, as well as how to improve your credit score, and borrowing ability. Excessive debt tells its own story. It is the first place to look if your net worth is trending downward. This, however, is only part of the picture.

Is your financial health bringing you wealth

Optimize Your Spending Habits

Keeping track of your spending habits allows you to monitor and control your debt-to-income ratio. You can do this by entering all cash payments, debit, and credit card charges into either a spreadsheet, or budget and expense tracking program such as Quicken, Mint, or YNAB.

The advantage a tracking program gives you versus a spreadsheet is it links directly to your bank, and credit card accounts, minimizing the time you spend entering transactions. It also lets you automatically categorize expenses, giving you up-to-date information about spending trends, and generating a Profit and Loss Statement.

The experts at HKMP can help you determine which method will be the most effective and efficient for your activity and needs.

Knowing your monthly transactions allows you to create a budget to:

  • Manage essential and non-essential spending
  • Create a savings plan
  • Create a plan to reduce debt
  • Adjust your plans as variables change
  • Review interest rates on debt to pay off higher interest accounts first, or determine where refinancing could save you money

Mortgage interest rates have fluctuated dramatically since 2000, influenced by everything from Presidential elections to COVID, and the 2008 real estate crash. According to Freddie Mac, the annual average for a 30-year fixed rate loan in 2000 was 8.05%, vs. 2.96% in 2021. Re-financing a higher rate loan may be attractive since mortgage rates have dropped every decade. However, with the increase in applications due to COVID, lenders can set higher standards.

In order to ascertain if refinancing would improve your financial health enough to justify the effort, it’s important to educate yourself on whether your debt-to-income ratio and credit score (FICO) meet current requirements.

Most banks and credit card companies allow you to check your FICO score as often as you’d like without affecting your credit. If you’re considering refinancing, or making a large purchase, it’s a good idea to check your score regularly, see how it’s trending, and review the factors affecting your score. It’s another valuable tool for gaining insight into improving your financial health. In addition, by obtaining a credit report at least annually, you can monitor your credit card activity, review listing of secured and unsecured accounts held in your name, inquires of credit institutions and other alerts which can affect your credit score .

Financial Health and Major Life Changes

Awareness of your financial health allows you to develop healthy spending and saving habits, so you can meet current and future needs. When you monitor trends, both personal and external, you’ll know when it’s best to invest in assets, or pay off current debt to improve your net worth. In addition you can pro-actively  protect yourself and your family from unexpected emergencies.

Many factors affect your personal financial health:

  • Marriage
  • Births
  • Home and car purchases
  • Number of years to retirement
  • College Tuition

Unanticipated expenses, and fluctuating markets are a reality you can’t control. Monitoring and managing your debt and spending is to your financial health like the daily vitamins you take for your physical health.

Need a financial check-up? Reach out and let HKMP help you implement a plan to ensure a healthy financial future.