Harless Tax Blog
March 17, 2022 By Susan Kaplan
ESG factors are transforming both businesses and investing. ESG stands for Environmental, Social, and Governance, which are non-financial factors that have become an increasingly important part of the investment process.
Why are more investors are embracing the ESG investing movement in a bid to drive change and make the world a better place? People naturally want to align their investments with their values. In the old days, this meant sacrificing profit and focusing only on the long term. No longer; you don’t have to sacrifice returns to jump on the ESG train. Smart investors are seeking businesses that not only focus on increasing profits but also take steps to protect the planet, keep employees and customers satisfied and safe, and assist communities in need. Money invested just in ESG index and exchange-traded funds will jump to $1.2 trillion, according to BlackRock.
So what’s new in ESG that is creating this momentum?
1. Focus on ESG factors has actually increased the financial return of many portfolios. The S&P Composite 1500 ESG index, a broad measure of ESG-focused stocks covering U.S. companies of all sizes, returned 36.4% over the past year—barely a hair less than the 36.6% return of the S&P Composite 1500, its non-ESG cousin. Over the past three years, the ESG index has returned an annualized 18.6%, besting its counterpart’s 17.2% average yearly gain.
2. There has been criticism that it is difficult to quantify non-financial ESG factors compared to annual revenues or calculate a price-earnings ratio. In the past, ESG ratings, rankings and reports added more complexity than clarity, since the criteria is continually evolving, reporting isn’t standardized, and regulation is still emerging. The good news is that numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) are working to form standards and define materiality to facilitate incorporation of ESG factors into the investment process.
3. Companies are now getting vocal about their ESG efforts. Social media is one of the main reasons ESG has become so visible. Over the years, people have shunned “sin” stocks such as guns, tobacco, alcohol, etc., but this is a whole new level of awareness. People talk across social media platforms, and if a company isn’t treating its employees well, polluting the local water supply, employing children, or worse, word is going to spread quickly and it’s going to impact that company’s reputation. As more investors look into corporate responsibility, and more companies are going to step up to promote their ESG efforts.
4. The movement is no longer confined to millennials inheriting wealth or assets from their elders. ESG is gaining more traction across generations. According to a new national poll conducted by Kiplinger, more than 70% of respondents say a company’s environmental practices, social issues management and governance policies are very or somewhat important to them when choosing investments. Four in 10 respondents say they have purchased stocks or bonds in the past based on environmental, social or governance issues. Among millennials, the number jumps to nearly two-thirds. Almost eight in 10 (78%) say they are very or somewhat likely to add an ESG investment to their portfolio over the next one to two years.
5. Research shows that since the pandemic, social unrest and geo-political factors have exploded in the past 2 years, more respondents would be willing to sacrifice some performance on their investments to achieve an ESG goal. BUT THEY DON’T HAVE TO ANY MORE! Breaking it down by generation, 75% of millennial investors, 51% of Gen X investors and 35% of baby boomer investors would be willing to sacrifice some level of return. Almost half of respondents (49%) say that when it comes to ESG investing, they prefer mutual funds that hold a diversified portfolio of stocks with better environmental or social attributes. An even larger percentage of baby boomers (58%) say this is their preferred strategy.
Reach Out to Us: ESG is where purpose and profit can intersect. Buying stocks or funds that are planet- and people-friendly is becoming as important a goal among investors as saving for retirement. Whether you wish to make a positive impact on the environment, build a better future for all, or invest in your local community, ESG investments are worth consideration. Companies that consider these non-financial, yet material, metrics in their strategy are best poised to mitigate risk and succeed, thus increasing long-term business performance. We are here to assist you in making informed decisions.
Conservation of the natural world:
- Climate change & carbon emissions
- Air and water pollution
- Energy efficiency
- Waste management
- Water scarcity
Consideration of people & relationships:
- Customer satisfaction
- Data protection and privacy
- Gender and diversity
- Employee engagement
- Community relations
- Human rights
- Labor standards
Standards for running a company:
- Board composition
- Audit committee structure
- Bribery and corruption
- Executive compensation
- Political contributions
- Whistleblower schemes
Taxpayers may be able to claim a deduction on their 2021 tax return for contributions to their Individual Retirement Arrangement (IRA) made through April 18, 2022. Contributions for 2021 can be made to a traditional or Roth IRA until the filing due date, April 18, but must be designated for 2021 to the financial institution.
Eligible taxpayers can contribute up to $6,000 to an IRA for 2021. For those 50 years of age or older at the end of 2021, the limit is increased to $7,000. Qualified contributions to one or more traditional IRAs may be deductible up to the contribution limit or 100% of the taxpayer's compensation, whichever is less. There is no longer a maximum age for making IRA contributions.
Those who make contributions to certain employer retirement plans, such as a 401k or 403(b), an IRA, or an Achieving a Better Life Experience (ABLE) account, may be able to claim the Saver's Credit. The amount of the credit is generally based on the amount of contributions, the AGI and the taxpayer's filing status. The lower the taxpayer's income (or joint income, if applicable), the higher the amount of the tax credit.
While contributions to a Roth IRA are not tax deductible, qualified distributions are tax-free. Roth IRA contributions may be limited based on filing status and income. Contributions can also be made to a traditional and/or Roth IRA even if participating in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA-based plan).
March 17, 2022 By Susan Kaplan
Markets have been shaken lately, and investors both big and small are searching for direction and strategies to protect their portfolios. Early 2022 already recorded the highest inflation rate in 40 years, and the Federal Reserve has just lifted its key interest rate by a quarter of a percentage point on Wednesday, their first decisive step toward trying to tame rapid inflation by cooling the economy. Expect six more similarly sized increases over the course of 2022. Add to that the fact that big stock declines have already begun to drag down the market, and now the Russian invasion of the Ukraine has created a geopolitical crisis which has sent stocks tumbling even further. The S&P 500 continues to take a beating as investors watch Western sanctions against Russia damage global trade.
The Positive Side: The labor market and economy appear strong enough to handle higher interest rates. Experts do not anticipate a recession this year. However, mortgages, car loans and borrowing by businesses will be more expensive, but slowing consumption and investment will reduce demand and suppress surging prices.
The Negative Side: The ban on Russian oil exports could continue to push oil prices higher per barrel driving inflation a bit higher, for a bit longer than pre-invasion forecasts. The big picture is little changed. But American and European companies that have a significant presence in Russia will be hard hit. Emerging markets funds with disproportionate exposure to Russian stocks have already declined sharply.
The Opportunity: Gold prices hit $2,000 an ounce after investors flocked to the safe-haven asset after the Ukraine crisis worsened. Gold is coming back into its own with new all-time highs in prices.
The Disappointment: The Bitcoin and crypto slide proved digital currency is not the new “safe-haven.” Cryptos have not displayed any signs of being a store of value during the current geo-political and economic crisis.
The Outlook: A well- diversified portfolio of stocks and high-quality bonds will weather crises like the war in Ukraine, whether held directly or through low-cost mutual funds and ETFs. Defense contractors, gold, oil and gas stocks, cybersecurity companies, are expected to survive supply chain disruptions. Compared to Europe, the US is relatively insulated, and history shows geopolitical catastrophes such as the one between Russia and Ukraine can temporarily disrupt markets and increase volatility, but they don’t typically have long-term consequences for investors. Investors should stay calm and focus on their long-term plans. If your investing strategy is sound, it probably shouldn’t change.
REACH OUT TO US: Investors might be tempted to overreact and sell their investments, but any knee-jerk reaction you have to the situation is more likely to hurt you, rather than staying the course. If you are uncomfortable with the amount of risk and volatility rate in your portfolio, come speak with us about a free risk assessment and portfolio analysis. We are here to assist you in making informed decisions.
By Susan Kaplan
January is a great time to review contributions to your retirement plans. Starting in 2022, the maximum contribution that individual U.S. taxpayers can contribute to their 401(k) plans will increase to $20,500, up from $19,500 for 2021 and 2020. With the cost of living rising and increases in inflation, higher phase-out limits make many more taxpayers eligible for fully deductible contributions. For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to $68,000 to $78,000, up from $66,000 to $76,000. Be sure you take full advantage of this tax benefit. Note the chart below detailing the new annual contribution limits for the more popular retirement programs.
Ideas for the New Year
If you have not already done so, consider:
- Setting up new accounts for a spouse or dependent(s)
- Reviewing the status of your retirement plan including beneficiaries
- Consider other tax-advantaged plans like Flexible Spending Accounts (health care and dependent care) and prepaid medical savings plans like Health Savings Accounts.
Additional Changes for 2022
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2022:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to $68,000 to $78,000, up from $66,000 to $76,000.
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to $109,000 to $129,000, up from $105,000 to $125,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- The income phase-out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for singles and heads of household, up from $125,000 to $140,000. For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
- The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500.
What Remains Unchanged
The limit on annual contributions to an IRA remains unchanged at $6,000. The IRA catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000.
Reach Out to Us: A missed year is a missed opportunity that does not come back. This is the best time to review the yearly savings limits of your favored plan for 2022 and adjust your contributions. If you are 50 years or more, add the catch-up amount to your potential savings total to take full advantage of the savings opportunity. Take note of the income limits within each plan type. For traditional IRA’s, if your income is below the noted threshold, your taxable income is reduced by your contributions. The deductibility of your contributions is also limited if your spouse has access to a plan. In the case of Roth IRAs, the income limits restrict who can participate in the plan.
By Susan Kaplan
Looking back at 2021, so much happened: market rallies and declines, fluctuating interest rates, Delta then Omicron, inflation, political polarization, etc. Surprisingly, 2021 was a good year overall despite volatility, most markets trended up, and the U.S. was in the lead.
COVID is lingering, but unemployment is still lower than expected, corporate profits are rising, and real estate owners are elated over the value of their bricks and mortar. What goes up must come down? Maybe not just yet though! The formation of households continues to rise, millennials are moving to the suburbs, and the housing market remains strong.
Current worries include the fact that the Fed has signaled rate rises in 2022, but they may not be as severe as expected, and may not be as damaging to the economy as previously feared. The years from 2013 to 2019 show that the economy and the markets can do quite well with rates between 2% and 3%. However, some clients may want to review fixed-income holdings and be sure that their portfolio includes asset classes that fare better in a rising rate environment.
Also on the list for hand-wringing, add that a5%+ inflation reading came back in 2021, due to supply chain problems and shutdown issues, as well as rising labor costs and housing price tags. A closer look reveals that companies have still been able to raise their prices and not damage their profits due to rising costs across the board.
So what are the lessons to be learned?
- That with so many variables in the financial environment, proactive and comprehensive wealth management is more valuable than ever. Those who had proactive relationships with their financial advisor were able to take advantage of the market volatility and execute some loss harvesting as the year went along. Without ever harvesting losses that were produced in 2021, many buy-and-hold fund investors paid quite a tax bill due to the lack of proactive planning.
- Don’t Panic about interest rates. Rates have moved up sharply in recent days and stocks have pulled back, but that is a far cry from derailment of the economic train and the markets as well. Growth stocks are showing the strain, the housing sector might slow down as mortgage rates increase, but again this trend is an adjustment. The economy and markets can and do adjust to changes in interest rates. The current trend is moving faster than what we are accustomed to, but the rate increases are a necessary adjustment as we return to normal. They have certainly generated turbulence in markets in recent days, and we might well get more turbulence before this scenario is over.
- Keep calm and carry on. The stock market’s gain during President Biden’s first 100 days in office was one of the best ever. The current rate cycle is a needed—and overdue—return to normal. All in all, the economy also did quite well the first year under President Biden. Separate your politics from your investments. Many people have not liked past presidents, only to miss out on big gains. A strong economy matters a lot more to your investments than the makeup of Congress or who is in the White House.
Reach Out To Us: Whether it is politics or the pandemic that worry you, over reacting to short-term charts, or panicking from headline news, is no way to play with your portfolio. You need to have a good diversification strategy, and rebalance periodically, which is better than trying to time markets with frequent trades. Even though there were no major tax changes enacted in 2021, the winds of change may blow in later in the year, and we are ready to discuss action plans with clients in order to make the best of any potential changes in legislation.
- Control excessive and frivolous spending. Remember great fortunes are often lost one dollar at a time! That $4 Starbucks every day adds up to over $1400 a year.
- Take a look at your recurring monthly payments. If you haven't gone to the gym in over 9 months, maybe rethink the membership and lose the fee.
- Don't live on borrowed money. Think twice if you're using credit cards to pay for essentials. Unless you pay the card off every month, the interest is killing you.
- Think twice about a buying a new car this year. If you need to buy a car, consider one that uses less gas and costs less to insure and maintain. Do you really need a gas-guzzling SUV? Reconsider if you're buying more of a car than you need.
- Remember when COVID first hit? If you were sorry then that you didn't have an emergency fund, now is the time to start building one. A good buffer is to keep three months' worth of expenses in an account where you can access it quickly.
- Make your money work for you and reap the tax benefit. Making monthly contributions to designated retirement accounts is essential for a comfortable retirement. Take advantage of tax-deferred retirement accounts and/or your employer-sponsored plan. Harness the power of compounding.
- Make spending some time planning your finances a priority. Know what your short term and long term goals are.
- Look over your W-2 withholdings and make necessary changes for 2022.
- Review your insurance coverage for necessary increases and change of beneficiaries.
Other important items to consider: Start to organize your tax records, and create a list of expected tax forms you will be receiving. Inform our office of any changes in address, filing status, employment, sale or purchase of large assets, births, deaths, etc. We want to help you keep as much of your money in your pocket as possible, and not in Uncle Sam's.
by Susan Kaplan
Medical tax provisions adjusted in 2022 for inflation: For the 2022 tax year, you can put up to $2,850 in your F.S.A. That's a $100 increase from 2021's $2,750 F.S.A. contribution limit. The rollover amount goes from $550 in 2021 to $570 in 2022. As far as an H.S.A. goes for 2022, the self contribution is $3650, and for a family it is $7300. There is a $1000 "catch-up" if you are 55+.
Standard & itemized tax deduction inflation changes for 2022 tax year: Effective tax planning means knowing how your current tax year’s circumstances might be different in the one ahead. Comparing the numbers helps you determine if you should postpone some earnings into 2022, where the income tax brackets are a bit wider, so you won’t be bumped into a higher one on your 2021 return. And what about deductions? It could be better, based on the current and next year’s standard amounts, for you to shift some deductible tax expenses from this year into the next or vice versa and itemize. HERE's a sneak peek.
IRS announces changes to retirement plans for 2022: The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, is increased to $20,500. Limits on contributions to traditional and Roth IRAs remains unchanged at $6,000. Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If neither the taxpayer nor their spouse is covered by a retirement plan at work, their full contribution to a traditional IRA is deductible. If the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced or phased out until it is eliminated.
Bunch your expenses to make tax itemizing worthwhile: Bunching is when you gather enough allowable expenses so that they total enough dollars to exceed your standard amount. Essentially, you bunch them together into one tax year. So instead of giving to your favorite charity every year, double up in one year when you're close to making itemizing worthwhile. You can pull expenses into this tax year, but bunching also works when you push, too. If you have control over an expense that would go to waste in one tax year, push it into the next one. You can alternate years of claiming the standard deduction and itemizing and are not locked into an irrevocable deduction election. You and your Fuoco tax professional should choose the method that gives you the best tax result each year.
Watch your thresholds: Pay attention to your Schedule A medical claims. This deduction requires you have enough allowable health care costs to exceed 7.5% of your AGI. This means that if your AGI is $50,000 you must have medical write-offs of more than $3,750. Don't miss any deductible medical expenses - add the cost of COVID-19 home tests to the medical write-off list. You have no control over when accidents happen or major medical treatments are needed, but if you can, schedule eligible medical expenses when beneficial and tax-efficient.
Capital Gains Harvest Season: The end of the tax year is a good time to evaluate your investments. In most cases, folks are looking at their assets to cut those that haven't done so well. By selling losers, or tax loss harvesting, you can offset any capital gains you've had in the tax year. If you have more losses than gains, you can use up to $3,000 of those excess bad investments to offset your ordinary income. Harvesting losses can help high earners reduce their NIIT amount. Beware the Wash-Sale rules, and be sure you understand basis, long term vs short term holding consequences, and more.
By Susan Kaplan
The possibility of higher capital gains rates has fueled interest by investors in Qualified Opportunity Zone funds. Investment is incentivized by a deferral of capital gains that otherwise would be reported in the year they were realized. With the tax recognition deadline of December 31, 2026, still in place, taxpayers who wish to invest unrecognized gains in QOZs need to do so prior to December 31, 2021, in order to obtain any step-up in basis benefit.
Although some investors missed the original deadlines, they can still get a 10% break on the taxable amount of their investment if they hold it for at least five years by the end of 2026, but that benefit that goes away after 2021. The icing on the cake is the 100% exclusion of tax on the appreciation of assets placed into the fund. The 10% forgiveness after five years applies to the gain on the sale of assets put into the fund, while the entire exclusion from tax applies to any appreciation after the amount is in the fund.
Understand the risks – and the rules. Recently, taxpayers were granted additional relief with respect to the 180-day window for investment, the reasonable cause exception to the 90% test, and additional time for any property being substantially approved. However, the gain recognition deadline has not yet been extended. For taxpayers, this means that any deferred gain on assets held in a QOZ must be recognized by the taxpayer by December 31, 2026.
Only a few states have not followed the federal treatment of qualified opportunity funds. New York decided that, effective in 2021, they would pull out of the program for new investments.
CONTACT US: Qualified opportunity zones allow investors to redirect some or all of their unrecognized capital gains into underserved, economically distressed communities in exchange for tax breaks assuming certain requirements are satisfied. With the tax recognition deadline of December 31, 2026, still in place, taxpayers who wish to invest unrecognized gains in QOZs need to do so prior to the yearend 2021, in order to obtain any step-up in basis benefit. An increase in the basis of the unrecognized gain is available if the unrecognized gain is invested in a QOZ for five years (10% basis step-up). Even if satisfying the five-year requirement for a 10% basis step-up is not possible, investors will still receive the benefits of a deferral of capital gains until December 31, 2026 and an elimination of the tax on any gains from a QOZ investment if the QOZ investment is held for 10 years. Questions? We have answers!
By Susan Kaplan
For years, the IRS has been gunning for a fight with S-Corporations over reasonable compensation. Their guns are now loaded, so get ready, because since 2000 when the IRS established its authority to reclassify distributions as wages and reinforced the employment status of shareholders as employees, it has had S-corps in its sights. Things got serious in 2009, the IRS recognized that reasonable compensation under-reporting was a major compliance issue, and set out to correct it.
COVID brought a short ceasefire. By 2019, examiners were trained to address the long-standing concern over inadequate reasonable compensation and bring S-Corp owners into compliance. Audits picked up momentum, but then COVID hit. So, will the IRS resume its assault on S-Corps and owners’ compensation in 2021? Get ready, because even if the IRS doesn’t show up until 2022, they will likely show up with guns loaded.
The best way to prepare for a reasonable compensation challenge is to be proactive. This means determining reasonable compensation using the IRS’s own criteria and guidelines, not poor past practices.
Advice For Our S-Corporation Clients:
- We must compute and document shareholder basis in the S-Corporation each and every year. The TCJA strongly implies that in the case of shareholders claiming a loss, basis be calculated, and in your best interest, Fuoco Group believes this should not be limited to a loss year. It is to an owner’s advantage to be well aware of their basis in their entity. We firmly believe that the honeymoon period is over for S-Corps.
- It has long been a requirement that S-Corporation owners need to pay themselves “reasonable” W-2 compensation. Put simply, if you’re making money, you’d better be giving yourself a paycheck. And hidden in the TCJA is a latent license for the IRS to go hunting for this. As your tax advisor, Fuoco Group simply cannot let you ignore this. It needs to be resolved and resolved quickly.
And Some Advice For Our Partnership Clients:
Each year, partner capital accounts have to be presented on a tax basis. Your capital account = your tax basis in the partnership, and the IRS wants to see it. Your Fuoco Group tax advisor CANNOT release the tax return without the calculation.
By Susan Kaplan
The new 2022 car and truck models will be in dealership showrooms soon. If you’re in the market for a vehicle for your self-employed business, don’t forget to factor taxes into the equation. You may deduct vehicle expenses in one of two ways.
- Actual expense method, which allows you to deduct your actual expenses based on the percentage of business use, and you ‘re in line for depreciation deductions, (subject to certain limits).
- Standard mileage rate, which for 2021 is 56 cents per business mile, plus you can add on business-related tolls and parking fees.
Regardless of which method you use, keep detailed contemporaneous records as proof in case the IRS challenges your deductions. Notably, you must record each business trip, including the date, location, distance and business purpose. But the record keeping for the actual expense method is even more burdensome because you must account for every deductible expense.
Often the actual expense method will produce a bigger annual deduction, and justify the hassle. You may get a tax boost from the rules associated with depreciation deductions. However, to deter excessive deductions, the tax law imposes “luxury car” limits, which actually kick in for moderately-priced vehicles
There are two critical tax breaks available for business vehicle purchases:
- You can claim a current deduction under Section 179 up to the annual luxury car limits. Example: For a passenger car placed in service in 2020, the limit was $10,100. (The 2021 limits will be announced shortly.) Then you are entitled to a deduction in succeeding years under cost recovery tables.
- You can claim a first-year bonus depreciation deduction. Currently, the maximum deduction for a passenger vehicle is $8,000.
- The actual deduction amounts are based on the percentage of business use. If you’re entitled to a $10,000 maximum Section 179 deduction for a car and you use it 90% for business, your deduction is $9,000.
- Comparable rules apply if you lease a car instead of buying it. In either event, a self-employed taxpayer is in line for generous write-offs.
CONTACT US: This just the tip of the iceberg on Tax Deductions for Self-Employed Business Vehicles. The tax aspects can be critical in this area. Make sure you understand all the rules before you go car shopping. Generally, you can claim deductions for vehicle expenses as a self-employed taxpayer, but other special rules may come into play. For instance, if you buy a heavy duty SUV instead of a passenger vehicle, you may qualify for a deduction of up to $25,000. Also, you might benefit from a special tax credit for electric cars of up to $7,500.