Most self-employed persons know the impact the Internal Revenue Service (IRS) can have on your business. They can often be an unwanted partner, sharing in your profits at rates over 50%. For many, it seems the harder they work, the harder the IRS wants to squeeze. For this reason, I would like to share a few tips to keep more of your money in your pocket, and out of the hands of the IRS.

The first strategy I want to mention is proper entity election. I spoke in a previous article about the different types of entities available to the self-employed. Current tax law allows most small businesses to make an S election and be taxed as an S Corporation. After taking a “reasonable wage” for your services provided to your business, the remaining profits from the S Corporation avoid the 15.3% self-employment tax. In addition, you need to determine if your participation and investment in the business is material enough to be considered non-passive. Or, are you simply a passive investor. If your passive income is defined as such by the IRS, then it is not subject to self-employment tax. On the flip side, losses from passive activity may be suspended but can be used to offset income in future years.

A second strategy is to offer a retirement plan. There are an array of retirement plan options available to self-employed persons and small businesses. For the most part, you will have to offer a plan to your employees if you want to participate in a retirement plan through your business. Contributions on behalf of your employees, and certain funds contributed to yourself through the proper entity, are a business deduction and can reduce your taxable income for both income and self-employment tax. If you have no other employees, you still have retirement plan options available to you. Depending on your entity and income, you can contribute upwards of $60,000 into a retirement plan each year. That $60K contribution is a deduction on your tax return, and limits the IRS’s impact on your business and profits. The retirement plan contribution goes into an account that can be invested and used for your future retirement. Withdrawing from the retirement account will be taxable, but with proper planning, the tax affect will be much less severe in retirement. Think of retirement contributions from self-employed income as a way to park profits in an investment account, out of the hands of the IRS, until the time comes that you will need the funds.

The final strategy to mention is for self-employed parents. Instead of giving your able-bodied offspring free money, make them work for it. While the IRS does not have any age restrictions, your child must be providing a service for your business to count as an employee. If your child is under the age of 18, no FICA taxes will have to be withheld from their wages. The 2022 standard deduction is $12,950. This means if you were to pay your child less than $12,950 to perform services for your business (and they had no other income), no taxes would be owed on their wages. In addition, your business will receive the deduction reducing both taxable income and self-employed earnings. This will open the ability for your child to invest in IRAs. The wages can also be managed in a savings or UTMA account to plan for your child’s future, college or otherwise.

In summary, just be aware that there are many opportunities to limit the IRS’s impact on your hard-earned money, while also planning for your future and the future of those you love. As always, I recommend speaking to your attorney, CPA and CFP® to make sure you are selecting all the right options for yourself and your business.

Published in the Victoria Advocate

Adam Baucom, CPA/CFP® is a Senior Tax Manager for Keller & Associates CPAs, PLLC and an Associate Advisor for KMH Wealth Management, LLC.

It is hard to believe it is already February. The time of year when important tax documents begin disbursing to mailboxes and e-mail inboxes across the country. Americans begin bracing for the impact of another year of sorting and organizing what can feel like mountains and mountains of tax documents. 2021 taxes may lead to having even more paperwork to sort through as we navigated another year of new legislation brought by an attempt to stimulate the economy weakened by the continued pandemic. Two of the bigger tax stimuli that will effect most people are the 3rd round of Economic Impact Payments (EIP #3) and Advance Child Tax Credit payments. With all of these tax changes I find myself often wondering, “How does the average person, not in the industry, manage to keep up with all of this stuff?!” As filing season officially began on January 24th, I thought it would be timely to share information on these tax items unique to 2021.

EIP #3, is similar to EIP #1 & #2 from the 2020 tax year in the sense that it is an advanced payment that will later be reconciled on your income tax return. The full amount of EIP #3 is $1,400 per taxpayer and dependent on your tax return. Depending on the amount of advanced payment received during the year and your Adjusted Gross Income (AGI), you may be entitled to an additional tax credit for up to the full amount. Fortunately, the opposite does not apply. If you received too much of an advanced payment from EIP #3, lucky you, there will not be any repayment amounts. EIP #3 was released in early 2021 and if you did receive by deposit or check, will be reported to you on IRS Letter 6475. Verify the amount reported on Letter 6475 against any deposit received and keep it handy for your tax return preparation.

The next item unique to 2021 are the Advance Child Tax Credit payments. These payments began on July 15, 2021 and for most taxpayers, were based upon your 2020 information. Unless opted out of, these payments were sent to “qualifying” taxpayers on a recurring monthly basis with the intent of pre-paying one-half of the estimated 2021 credit. For 2021, this credit increased to $3,600 for children ages 5 and under, and $3,000 for children ages 6 through 17, (excluding income phase-outs). Similar to EIP #3, when the 2021 return is filed there will be a reconciliation of the amounts received for the Child Tax Credit vs. the eligible credit amount. The key difference to this reconciliation in comparison to EIP #3 is, if too much credit was received, there will be a “claw-back” on the 2021 return that will reduce potential refunds or even require repayment. Any of these amounts received will be reported on IRS Letter 6419. If Married Filing Jointly, each taxpayer will receive their own Letter 6419. Verify the amounts reported on Letter(s) 6419 against any deposits and keep it with your tax documents.

Any inaccuracies on these figures when filing your tax return will significantly delay processing and any associated refunds, making it increasingly important to report accurately. Hiring a Certified Public Accountant will help ensure that you are filing a complete and accurate return.

Published in the Victoria Advocate

Christopher Laughhunn CPA/CFP® is the Tax & Accounting Principal for Keller & Associates CPAs, PLLC and an Associate Advisor for KMH Wealth Management, LLC.

This is part 1 of a 2 part article series discussing unexpected loss.

The old saying goes that two things in life are guaranteed, death and taxes, yet so many avoid planning for either. Recently, I had a family friend that was faced with dealing with the unexpected loss of her spouse. With a young family and job to keep afloat, I couldn’t help but worry if she knew the additional full time job she was going to encounter handling all of the items that come with the passing away of any loved one.

Whether or not you have prepared for the loss of a spouse (more on that in my next article), this stage will be overwhelming and the list of to-do’s will seem long and monotonous.

Your first thought may be that money isn’t the first priority when you lose a loved one, and you’re absolutely right, but an engaged financial advisor or CERTIFIED FINANCIAL PLANNER™ professional should be able to assist you in your next steps. Reviewing your spouse’s estate documents, pursuing life insurance proceeds and discussing your loved one’s final wishes will require serious attention. With your advisor working to spearhead these conversations, you will have more time grieve and focus on your family. Here’s a list steps you may consider next:

1. Notify the insurance companies. To claim life insurance benefits, you should contact your insurance agent or check the company’s website to find out exactly what documentation you will need to provide. Additionally, if your spouse carried health insurance through his or her employer, you will need to contact the human resources department to determine how long coverage will continue, so that you can plan accordingly. Check in with the insurance companies that carry your home, auto, and other policies. These policies may need to be updated, and some may no longer be necessary to carry.
2. Inform Social Security and Medicare. One to two months after death, you’ll want to let the Social Security Administration know about the passing of your loved one. Social Security benefits are a crucial area to pay close attention to after the death of a spouse. Keep in mind that this isn’t just for those over 65. If your spouse earned 40 credits (10 years of work) towards Social Security, you and any children you have under the age of 18 could be entitled to monthly survivors benefits.
3. Cancel all credit cards and identifications. You’ll want to contact and cancel all credit cards your loved one may have had as well as identification documents like passports and driver’s licenses. Identity theft after death, now termed “Ghosting”, has become unfortunately common and identity thieves exploit the time between an individual’s passing and the cancellation of this information.
4. Update your beneficiary information and reassess your finances. Long term, you will need to start to plan for what life looks like now that your life circumstances have changed. Your advisor should work with you to decide what debt, if any, should be paid off, how funds should be invested to save for the future, and guide you towards getting your financial life back in order. You’ll also want to update the beneficiary information on any retirement accounts and life insurance you may have.

While dealing with the unexpected death of a spouse or loved one is never easy, working with the right person or team can make your next steps to your new normal easier. If you don’t currently work with an advisor, or if your advisor isn’t taking the time to discuss these things with you, I recommend adding a CERTIFIED FINANCIAL PLANNER™ professional that you trust to your to do list.

Published in the Victoria Advocate

Sara Potts is a CFP® Professional and Operations Manager with KMH Wealth Management, LLC.

Hopefully you have experienced a wonderful holiday season with loved ones and friends, and exchanged gifts and merriment.

You have given the gifts you thought appropriate or needed to your loved ones. These gifts hopefully will make their lives easier, more efficient or add some excitement to their lives. However, have you thought about the gift that will keep your legacy alive through the generations of your family? This is the gift of communicating your stories and other family stories.

Communicating these stories should be part of your estate plan. Yes, we all think of wills, setting up trusts, naming an executor and beneficiaries and setting up funeral arrangements as the essence of an estate plan. The goal of an estate plan is to preserve your assets, which also includes your intangible assets such as your stories, life learned values and unforgettable memories.

According to the book “Aged Healthy, Wealthy & Wise,” a study conducted around legacy issues interviewed 2,627 baby boomers and elders. Baby boomers viewed the non-financial aspects such as values, life-lessons, and family stories as 10 times more important than the real estate, money and other tangible assets. Although 68% of the elder generation agreed they should be having these conversations, only 31% felt they had had these discussions.

Knowing more about our family history gives us a stronger sense of who we are and how our values were formed. According to an NPR survey, relating personal stories reminds people of their shared humanity, helps them see the value in everyone’s life story and experiences, humanizes social issues, events and policies and makes people feel more positive about society.

Considering all the benefits of sharing stories, you would think that would be a priority as we age. As a personal note, my mother helped train glider pilots during World War II. I only happened on to this when I found a picture of her at Sheppard Field in Wichita Falls, Texas. When I asked her, all she said was she helped train glider pilots. Like many other World War II service members she kept that story to herself. I would have loved to have known more, as gliders and their pilots played pivotal roles in World War II. Also, a man in Victoria called me after reading my mother’s obituary who thought he had her as his glider instructor. There is a museum in Lubbock, Texas called the Silent Wing Museum dedicated to the glider program in World War II.

Make it a priority when doing your estate planning to record or make sure everyone at your family gathering is making note of your stories. What might be insignificant to you today will be tomorrow’s family legacy. There are many ways to record your stories, from filming a video, to recording your voice, to writing the stories down.

As I age, one of my bucket list activities is to write a book with the stories I remember about my parents and some tales, hopefully not too tall, about my life! Hopefully, it will be a best seller – with my children.

Published in Victoria Advocate

Phyllis Keller, MBA is the Chief Information Officer for KMH Wealth Management, LLC and Keller & Associates CPAs PLLC.

This is part 2 of a 2 part article series discussing retiring more successfully.

One of the most important things that you can do to set yourself up for success in retirement is to develop a solid financial plan. There are many planning strategies that a CERTIFIED FINANCIAL PLANNER™ professional can assist you with. Here are a few that I consider to maximize a client’s retirement success.

One retirement strategy that resonates with most is to plan to pay less in taxes, by paying the lowest tax rate possible. This is often easier said than done, and requires careful planning over a number of years. Do you have a year of low income? Perhaps you expect to make more money in the future from raises or required minimum distributions from an IRA, or perhaps you just expect that taxes will be raised in the future to pay for the massive spending packages being proposed and government debt already incurred.

If you are in a lower tax bracket now compared to where you expect to be in the future, a Roth Conversion can be a great strategy. With a Roth conversion, you pay tax at your current rate and are able to allow your Roth IRA to grow, with all earnings tax free if the rules are followed. There are added benefits as well, such as no distributions being required during the original account holder’s life.

Social Security is a significant fixed income source for many retirees. You paid into Social Security for many years, so it is important to maximize your hard earned benefits when you finally begin drawing. Unfortunately, 34% of people claim Social Security benefits early at age 62, locking in a lifetime of reduced benefits. Waiting until full retirement age increases benefits by 30%, and for every year you delay past full retirement age until age 70, your monthly benefit increases by 8%. The decision gets more complicated when you have an ex-spouse or deceased spouse record that you may file on, or other factors like pensions from jobs you did not withhold Social Security from. Discussing the risks and opportunities of different filing strategies with a financial advisor can help you maximize your hard earned benefits.

For those fortunate enough to still have a pension, you may have some critical choices to make at retirement, such as a lump sum payout versus pension for life, and further choices of single life or joint and survivor annuity options. With so many decisions, it is important to analyze your options. A single decision can make tens of thousands of dollars of difference, and there is no single best option for each retiree. Be sure to seek assistance as the right choice can easily pay for itself several times over.

Annuities have long been a popular strategy, but often come with concerns of high commissions and conflicts of interest. More recently, commission-free annuities are becoming more popular. A fee only advisor will recommend these, and not “sell” them. A broker typically sells annuities. By stripping out commissions, these products often have more advantageous rates, which can result in better returns to annuity holders. With low interest rates on bonds, commission-free annuities can be attractive alternatives. Annuities may provide you income for life and allow participation in market growth depending on the annuity’s structure. Annuity products are extremely diverse, so it is paramount to fully understand any annuity before adding it to your portfolio.

There are many more planning strategies that may be available to you in your particular situation, and it is important to talk to a CERTIFIED FINANCIAL PLANNER™ professional that has experience in these areas to facilitate your path toward a successful retirement!

Published in the Victoria Advocate

David Faskas is a CFA and CFP® Professional with KMH Wealth Management, LLC. He specializes in investments and portfolio management. He is the Chief Investment Officer, Chief Financial Planning Officer, and a managing member of the firm.