To provide for your retirement security, saving for when that paycheck stops is imperative. Fortunately, the IRS will be allowing you to do more of that now. Thanks to inflation’s impact on the overall cost of living, the contribution limit for employer retirement plans and IRAs has jumped.
Participants in a 401(k), 403(b), 457 and the federal government’s Thrift Savings Plan can contribute up to $22,500 in 2023 plus an additional $7,500 catchup contribution if you’re age 50 or over (for a max of $30,000). That is up significantly from the 2022 contribution limits of $20,500 or $27,000 if you are age 50 or over. Maximum IRA and Roth IRA contributions have increased to $6,500, up from $6,000 in 2022, plus an additional $1,000 if age 50 or over. The income phase-out for determining eligibility for contributing to a Roth IRA will be $138,000-$153,000 single or head of household and $218,000-$228,000 for married filing jointly.
So, how can you take full advantage of these changes? Below are some of the ways to capitalize on the new contribution limits.
Maximize your contributions
Now is a great time to increase your contributions without the worry of negative tax effects. The IRS will be making it even more affordable to make larger contributions to retirement savings by having significantly increased the standard deduction and the tax brackets, thereby reducing your income tax.
Even if you maximize contributions to an employer retirement plan, you can still contribute to an IRA if you have enough earned income to count towards both. Your deduction for a contribution to a Traditional IRA may be limited when you or your spouse contribute to a retirement plan, but it may still be beneficial to contribute to an IRA on a nondeductible basis. The contribution could enjoy tax-deferred growth, which maximizes the potential to accumulate more money. When it comes time to take distributions, some portion would come out tax-free due to that nondeductible contribution creating tax basis. Every little bit helps.
Consider a “backdoor” Roth IRA
Making a nondeductible contribution to a traditional IRA could also give you the opportunity to do a backdoor Roth IRA, if you have no other pre-tax balances in IRAs, SIMPLE IRAs, or SEP IRAs. Having a pre-tax balance in these other accounts could cause a portion of the backdoor Roth IRA to be taxable on conversion of the traditional IRA to a Roth IRA. However, you could possibly roll those pre-tax balances up into an employer retirement plan to “clear the deck” for doing backdoor Roth IRAs.
Set up savings plans for each venture
If you have a side business, you may be able to contribute to a retirement plan for that business, even if you contribute to an employer retirement plan at work. There are different types of retirement plans, so the right fit would depend on the structure and income of your side business, the type of employer retirement plan you participate in elsewhere and what you contribute to that. In these situations, it’s best to work with a financial planner or your tax advisor to determine what your options are.
Life and finances are surely a balance, but these increased limits enable you to put more aside for later. It’ll be here faster than you think. Typically, you can accumulate more money when the balance can grow tax-deferred, so these vehicles can be a great place to save for retirement.
Cindi Turoski is managing partner of Bonadio Wealth Advisors, LLC, the financial planning division of The Bonadio Group. She is also co-leader of the Firm’s Estate & Trust Team. With over 30 years of deep tax and financial planning experience, she provides consultative services to a wide variety of clients, further specializing in closely-held business owners.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
If you think accounting firms are simply the closers of books, you may want to think again – more often than not, they are fountains of information. The COVID-19 pandemic showed consumers just how important accounting firms can be in navigating new government regulations and programs – like Paycheck Protection Program loans and the Employee Retention Credit – quickly and adeptly.
“There’s been a shift in clients looking to us to provide proactive services, rather than just compliance,” said Mark Kovaleski, managing partner of the Rochester-based Mengel Metzger Barr & Co. LLP a public accounting firm, where he has been a team member for almost twenty-five years. “There’s more of a focus now on being business advisors and providing a business advisory relationship.”
Nancy Catarisano, managing partner of Insero & Co. CPAs, LLP a public accounting firm with locations in Rochester and Ithaca has seen the same trend, noting “Since the pandemic we are doing a lot more advising of companies.”
With that mind shift, the Rochester Business Journal asked Kovaleski, Catarisano, and other leaders of accounting firms in western New York what new and emerging issues and regulations should be front of mind for businesses right now.
One of the timeliest of these issues, Kovaleski said, was an announcement of failure to file penalty relief by the Internal Revenue Service (IRS) on August 24, 2022, for businesses and individuals who did not file their tax returns on time during the pandemic.
According to IRS.gov, nearly 1.6 million taxpayers will automatically receive more than $1.2 billion in refunds or credits for late filing. The refunds are automatic and most will be completed by the end of September. To qualify for the relief, any eligible income tax return from 2019 or 2020 must be filed on or before September 30, 2022.
The action is designed not only to provide relief to businesses and individuals but to help the agency focus its resources on the handling of backlogged tax returns and taxpayer correspondence with an endpoint of a return to normal operations for the 2023 filing season.
“The IRS is extremely overburdened and overwhelmed right now,” Kovaleski said. “They have millions of tax returns that haven’t been processed yet and this move will help them catch up. It’s a little bit of a reset and opportunity to get the ship righted.”
Another timely issue business owners should be aware of is a new accounting rule from the Financial Accounting Standards Board (FASB) called the Accounting Standards Update (ASU) 2016-02 – Leases or Accounting Standards Codification (ASC) Section 842 – that went into widespread effect on the first of this year.
The FASB is an independent nonprofit organization that serves as the standard-setting body for generally accepted accounting principles in the United States. This new rule requires businesses to record almost all leases longer than 12 months as liabilities. Formerly, operating lease payments were expensed as incurred.
This rule, which is a significant change in the accounting processes realm, was put into effect for public companies several years ago, but private companies did not have to comply until this year, partly due to an extension from the pandemic.
“Anyone who needs a financial statement should be aware of this change,” said Catarisano, who recommends that private business owners talk to their accountant about the lease accounting changes if they haven’t done so already. “While public companies had to do this already, it’s a new rule for private companies and adds another layer of complexity for small business owners.”
An emerging accounting issue business owners will want to keep an eye on are ESG regulations, which are requirements placed on a business by federal, state, or other entities to publicly disclose information about their environmental, social, or governance practices and performance.
In March 2022 the U.S. Securities and Exchange Commission (SEC) proposed rules that would require public companies to share specific greenhouse gas emissions metrics and climate-related financial data in public disclosures. These companies would not only have to share emissions they are responsible for but also (depending on the company’s size) from the upstream and downstream activities of vendors and other third parties connected to the company’s operations.
The comment period for the proposal drew such a heavy response it was extended from its original date in May 2022 to June 17, 2022, instead. No decision has been made by the SEC on the proposed rules yet.
David Hansen, director of risk advisory services for Freed Maxick CPA’s, which has offices in Batavia, Buffalo and Rochester, does not believe the proposed regulations are likely to stand as originally written, but will go forth in some variation and are important to get ahead of now.
“There is a tremendous amount going on in the ESG area right now and it’s not going to slow down,” Hansen said. “The proposal shows that the investor community is interested in whether companies are following through with ESG practices.”
Freed Maxick’s ESG practice is rapidly developing as several other notable changes and proposals have percolated in the past few years, like New York State’s Climate Leadership and Community Protection Act which was signed into law in 2019 and requires New York to reduce economy-wide greenhouse gas emissions 40 percent by 2030.
And earlier this year the state proposed ESG requirements for the fashion industry via the Fashion Sustainability and Social Accountability Act that would require large fashion retailers and manufacturers doing business in New York to make significant public disclosures about theirs and those in their supply chain’s ESG footprints.
The fashion industry proposal is just another indicator of what may be coming down the pike for other industries. For instance, if your company needs to invest in a new fleet of vehicles soon, you will want to consider the implications when choosing between gas or electric models.
“The unknown is always scary,” said Chad D. Ernisse, a senior manager at Freed Maxick, who encourages his business clients of all sizes and industries to be proactive and not wait for regulations to start thinking about and incorporating ESG best practices. “A lot of time regulation is viewed as a cost, but it’s also an opportunity.”
Ernisse and Hansen note that there are many doors through which ESG practices can enter a business – regulation being one of them, but another way is customer-driven and customers are increasingly interested and influenced by a business’s ESG choices and how they share them publicly.
“As the laws change it’s going to be important for companies to think upstream and downstream how ESG programs will affect their clients, vendors and the investment community,” Hansen said. “We’re here to help them assess their different programs and how they’re documenting them so that their customers can better understand what they’re doing with ESG.”
Caurie Putnam is a Rochester-area freelance writer.
On August 16, President Biden signed the Inflation Reduction Act of 2022 into law, completing the final component of his economic campaign. The bill contains various revenue raising provisions estimated to generate approximately $760 billion and spending programs costing approximately $430 billion over a 10-year period.
To reduce the federal deficit and lower inflation, the bill contains a few revenue-raising provisions that rely on revisions to tax laws. Among these are a 15% minimum tax on corporate book income, as well as a 1% excise tax on stock buybacks. Although these provisions are expected to generate substantial tax revenues, the former will only impact corporations with profits over $1 billion, and the latter may have tax implications on any publicly traded domestic corporation where an individual shareholder or shareholders sell their stock in that company back to the corporation.
But today, let’s discuss one revenue-raising provision that aims to enforce tax laws that currently exist, rather than create new ones. The Inflation Reduction Act outlines a near-$80-billion investment in the IRS to help reduce the “tax gap,” or the difference between what people pay in taxes and what they owe. Currently, the Treasury Department estimates the annual tax gap is about $600 billion, which the bill hopes to cut down by about $124 billion in revenue from tax enforcement over the next decade, according to a Congressional Budget Office estimate.
Where is the IRS funding going?
The bill outlines roughly $79 billion for the IRS to be phased in over 10 years. $45.6 billion is earmarked toward tax enforcement, $25.3 billion toward operations support, $4.8 billion toward business system modernization and $3.2 billion toward taxpayer services.
This means the funding will prioritize collecting owed taxes, conducting criminal investigations, and investing in new IT systems, according to IRS Commissioner Charles Rettig. IRS Commissioner Rettig specifically noted an increase in audit rates, back to historical norms, for large corporate and global high-net-worth taxpayers as well as in new areas such as pass-through entities and multinational taxpayers with international tax issues. Furthermore, he notes that the investment will not result in increased audit scrutiny on small businesses or middle-income American households making under $400,000.
A Treasury Department report from May 2021 estimated an investment of this size would enable the agency to hire roughly 87,000 people by 2031. While the act does not specifically state that the money will be used to hire this exact number of new agents, it’s reasonable to suspect that revenue-raising tax enforcement will require the IRS to beef up its staff and hire new employees. Just how many — and in what capacity — is still uncertain.
Attempting to reverse a decade of decay
One thing is certain: the agency needs help. Since 2010, the IRS’s budget and enforcement staff have been cut significantly, impairing its ability to appropriately perform its role as the country’s tax collection agency. A lack of resources and support has prevented the IRS from properly enforcing tax laws, and also backlogged the processing of returns, filings and notices. As of the writing of this article the IRS has approximately 9.7 million unprocessed individual income tax returns.
Now, many businesses and individuals are struggling with an unresponsive and delayed IRS, largely due to the lack of staff and funding. Many taxpayers who filed for a refund over a year ago have still not received it or a clear response from the IRS regarding its status.
Frustration over delays is understandable, but there are limited actions that even tax professionals can take to expedite the process.
Of course, contacting the IRS is the first step. But since the agency doesn’t have enough staff to answer the phones, callers are usually met with a pre-recorded message asking them to call back due to high call volumes. This is not surprising, since in the first half of 2021 alone, there were fewer than 15,000 IRS employees available to answer nearly 200 million calls, which is one person for every 13,000 calls, according to Treasury Department figures.
With $25.3 billion allocated for operations support and $3.2 billion for taxpayer services, the IRS will get a much needed shot in the arm to provide taxpayers with more responsive, efficient service.
The TAS: A short-term solution
Funds will be dispersed throughout the next decade as a long-term solution to a long-standing issue. The added staff should help the IRS process income tax returns, amended tax returns and other types of filings for taxpayers, but hiring is a national challenge across all industries. Recruiting and onboarding necessary staff will take time, and taxpayers may still find themselves disputing matters with a pre-recorded answering machine while the IRS awaits new support staff.
In the meantime, businesses and individuals should be aware of other means available to alleviate some of the headache. The Taxpayer Advocate Service (TAS) is a resource offered by the IRS to help taxpayers when faced with tax problems that they can’t solve on their own. As an independent organization within the IRS, the TAS is responsible for ensuring that every taxpayer is treated fairly, and that they know and understand their rights.
Specifically, the TAS can ensure that the IRS provides the taxpayer services that it should in an appropriate and timely fashion. When taxpayers experience a problem or delay while processing returns, notices or filings, that’s where TAS can step in to facilitate a resolution.
Any taxpayer can take advantage of the group’s services by filling out a Request for Taxpayer Advocate Service Assistance, which can be found on their website as Form 911. The form is four pages long, and while you can fill it out on your own, it can also be filed on your behalf by your tax professional as power of attorney. The TAS will review your form, and — assuming you meet the criteria — step in and contact the relevant IRS office or agent, who will then expedite the request.
When to get the TAS involved
The efficiency with which the TAS acts can be quite amazing, but there are certain criteria you must meet to receive their service.
First, your tax problem must be causing financial difficulty for you, your family or your business. For example, a small business that’s expecting a large refund may be struggling to keep their business running from a cashflow perspective, which would qualify them to seek help from the TAS.
If a taxpayer is not struggling financially, they (or their business) must be facing an immediate threat of adverse action. The IRS has been known to issue notices readily and often without the necessary support to handle them. If a notice threatens to put a lien on your account or on your business, among other things, this would give cause for the TAS to get involved.
Finally, if neither of the previous criteria apply, a taxpayer can still contact the TAS if they simply receive no response from the IRS (which is very common these days). This could mean you haven’t received a notice that your refund has been processed. It could also mean you haven’t seen the refund being processed for an amended return, an originally filed return or a refund claim within anywhere from 9-12 months. When the IRS office has not granted the tax assistance you requested in the appropriate amount of time, the TAS should intervene.
When NOT to get the TAS involved
Before seeking assistance from the TAS, you must first “exhaust all reasonable efforts to obtain timely relief through normal division channels,” according to the TAS website. These “reasonable efforts” will vary depending on your needs, but they typically involve attempting to contact the IRS by phone or mail if you’re inquiring about a return or notice, respectively. The latter does tend to work better, but either method of contact could present a situation in which the TAS would need to intervene even after efforts have been exhausted—especially given the IRS’s shortage of staff to attend to these matters.
What to expect
Ultimately, taxpayers and tax professionals can expect to see improved services from the IRS over the next ten years. The Inflation Reduction Act should provide the funds needed for the agency to perform its role more efficiently, and this has potential to benefit individual taxpayers as well as the nation’s economy. But as the kinks are worked out, taxpayers should continue to look to their tax professionals for resources like the Taxpayer Advocacy Service which can help smooth the transition. Even with improved taxpayer services, this funding is primarily geared toward raising additional tax revenues through enhanced enforcement of existing tax laws and regulations. To that end, individual and business taxpayers should continue to consult with their tax advisors to ensure proper compliance and understand any audit risks they may have.
Anthony R. Scinto, CPA, is a tax partner and chair of the Tax Department at Mengel Metzger Barr & Co.
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