Category: Uncategorized

September 11, 2024 | by Atherton & Associates, LLP

The SECURE 2.0 Act made it possible for employers to treat student loan repayments as elective deferrals for the purpose of matching contributions to retirement plans. To help employers implement this benefit, the IRS recently released interim guidance on how to comply with the Act. 

The new guidance clarifies the steps employers must take to align their retirement plans with this provision, ensuring that employees don’t miss out on valuable retirement savings while managing their student loans. 

Why this matters for employers

Employers now have the flexibility to contribute to an employee’s retirement plan even if the employee isn’t making direct contributions to the account but is instead making payments toward their student loans. 

This change benefits employees and employers alike. Typically, employees must pay their student loans regardless, which can lead them to opt out of their employer’s retirement plan, contribute very little to their retirement savings, or defer a substantial portion of their remaining compensation – making the overall compensation package less appealing. 

With student loan matching, employers can transform this inevitable expense into a strategic advantage. By allowing student loan payments to count toward retirement plan matching, employers can make their compensation and benefits packages more competitive and attractive, especially to younger professionals burdened with student debt. This not only enhances the appeal of your offerings but also shows a forward-thinking approach to employee support, which can boost loyalty and engagement. 

Which plans qualify?

Employers offering 401(k) plans, 403(b) plans, governmental 457(b) plans, or SIMPLE IRAs can take advantage of this new provision. 

Who qualifies, and how does it work?

A qualified student loan payment (QSLP) is any payment made by an employee during a plan year to repay a qualified education loan. This loan can be one the employee took out for themselves, their spouse, or a dependent. 

To be considered a qualified payment, the employee must have a legal obligation to make the payment under the loan’s terms. It’s worth noting that a cosigner may have a legal obligation to pay a loan, but unless the primary borrower defaults, the cosigner isn’t required to make payments. Only the person actually making the payments is eligible to receive matching contributions.

Employers can match these student loan payments just as they would regular contributions to a retirement plan. The matching contributions should be made in the same way and under the same conditions as any other retirement plan match. 

Uniform treatment

Matching contributions for student loan payments must be uniformly available to all employees covered by a retirement plan. Employers cannot selectively exclude employees from receiving QSLP matches based on factors like their specific role, department, or location. 

QSLP matches must be the same as other deferral matches

Matching conditions must be the same for QSLPs, if offered, and regular deferral matches. 

For example, if a plan requires employees to remain employed through a specific date to qualify for a QSLP match but doesn’t impose the same condition for regular deferral matches, this would not meet the uniform treatment requirement. 

All QSLP matches, if offered, must be uniform

If a retirement plan defines a QSLP in a way that only a certain subset of employees, such as those who earned a specific degree or attended a particular school, are eligible, the plan would violate this requirement. 

Plan amendments

As such, employers interested in implementing this benefit must amend their retirement plans to incorporate these new matching contributions. The amendment process should be done with careful consideration of the plan’s current structure and future compliance with IRS regulations.

Employee certification

To ensure that student loan payments qualify for matching contributions, employers (or third-party service providers) must collect specific information from employees. The following details are required: 

• The amount of the student loan payment

• The date the payment was made

• Confirmation that the payment was made by the employee

• Verification that the loan being repaid is a qualified education loan used for the employee’s own higher education expenses or those of the employee’s spouse or dependent

• Confirmation that the loan was incurred by the employee

Preparing for future updates

It’s important to note that the IRS’s current guidance is interim, with further regulations expected in the future. Until these proposed regulations are issued, plan sponsors can rely on this interim guidance. 

While this guidance is a significant step forward, it’s crucial for employers to stay informed about any changes that might affect how these benefits are administered. 

If you’re interested in student loan matching or enhancing your benefits package while staying within legal guidelines, contact our office today. We can help you navigate these new rules and ensure your benefits offerings are both competitive and compliant.

September 05, 2024 | by Atherton & Associates, LLP

Federal Reserve Chair Jerome Powell has signaled that rate cuts are on the horizon – it’s just a matter of time. As we prepare for this shift, it’s crucial to understand what these cuts might mean for your financial future. 

Currently, the Fed’s benchmark interest rate is at its highest in nearly 25 years, sitting between 5.25% and 5.50%. A potential cut of 0.25% to 0.50% is on the table, and while this might sound like good news, the move could impact everything from your mortgage to your savings. 

This article breaks down what you need to know about these potential changes and how to prepare so you can make informed decisions that align with your financial goals. 

Breaking down the rate cut

When the Fed talks about cutting rates, it means they’re making borrowing money cheaper. This is part of their strategy to keep the economy running smoothly. If you’re paying interest on credit cards or loans, a Fed rate cut means the interest you’re charged could go down, too. However, the impact on your finances might not be immediate or as big as you might hope, especially if the cut is small. 

While the first cut may not make a significant dent in your interest payments, it can signal the start of a trend leading to a more favorable borrowing environment over time. 

Historical trends

Historically, the Fed doesn’t slash rates all at once. Instead, they usually make small cuts over time, sometimes over several months or even years. This gradual approach allows them to carefully manage the economy without causing too much disruption. 

So, when might you start to see lower interest rates on your credit cards or loans? 

It usually doesn’t happen right away. Even if the Fed cuts rates in September, lenders might take a while to adjust their rates. When lenders adjust their rates, the timing varies depending on several factors, including market conditions, the lender’s business model, and competitive pressures. Generally, it can take anywhere from a few weeks to several months for lenders to pass on the benefits of a Fed rate cut to consumers. 

A study by the Federal Reserve Bank of San Francisco found that while some lending rates, such as those for adjustable-rate mortgages, tend to respond relatively quickly to changes in the Fed’s benchmark rate, others, like fixed mortgages, may lag by several months. 

The most recent major rate-cutting cycle occurred during the Great Recession from 2007-2008. The Federal Reserve cut the federal funds rate from a peak of 5.25% in September 2007 down to nearly 0% by December 2008. This series of cuts happened over approximately 15 months. During the early phase of these cuts, mortgage rates began to decline, but the most significant drops occurred about 6 to 12 months after the first rate cut. By mid-2009, mortgage rates had fallen to historic lows. 

Five financial moves to consider

Lock in high-yield savings ASAP

One of the most immediate and actionable steps you can take is to lock in the high interest rates currently available on savings accounts, CDs, and other safe investments. Currently, with the Fed’s benchmark interest rate at the highest level in nearly 25 years, savers have been enjoying some of the best returns in decades. But this window of opportunity may be closing soon, because the yields on savings accounts and CDs usually decrease when the Fed cuts rates. 

Given that CDs lock in a fixed interest rate for a specific term, they can be an excellent way to secure these higher rates before they potentially decline. If you’re worried about locking up all your money in a long-term CD, consider creating a CD ladder. This strategy involves spreading your investment across multiple CDs with different maturity dates. This way, you can benefit from higher rates now while also having some funds available to reinvest later. 

However, make sure your emergency fund is kept in a high-yield savings account. Not only will this help your money grow, but it will also be accessible when you need it. 

Work on your credit score to position yourself for lower rates

With a potential Fed rate cut on the horizon, now is the opportune time to focus on improving your credit score. Even if interest rates drop, a poor credit score could keep you from getting the best rates and terms. 

Start by reviewing your credit report for any errors or inaccuracies that might be dragging your score down. Make it a priority to pay all your bills on time and reduce any high balances, aiming to keep your credit utilization below 30% – ideally even lower. If your credit score is currently low, consider using a secured credit card to help rebuild it over time. These steps can position you to take full advantage of lower rates when they become available. 

Credit cards: take action as rates begin to fall

As the Fed raised rates, many credit card interest rates climbed as well. However, don’t expect your card’s interest rate to drop in line with the Fed’s rate cuts, especially if the reduction is modest – just 0.25%. Credit card companies are often slow to lower rates, if they do so at all. 

That said, falling rates could spark increased competition among credit card issuers. Some may start offering 0% balance transfers, lower rates, or other perks to entice you to switch. This puts the ball in your court: take the initiative to call your current provider and negotiate a better rate, or be prepared to shop around for more favorable terms. 

Plan ahead for major purchases

Major purchases, such as homes or cars, could also become more affordable as lower interest rates reduce the cost of financing. However, timing these purchases to align with rate cuts requires careful planning, as market conditions can be unpredictable, and increased demand might drive prices higher. 

Historically, mortgage rates tend to follow the trend of the Fed’s rate changes, but not always immediately. For instance, after rates were cut in the wake of the 2008 financial crisis, mortgage rates dropped significantly, hitting historic lows by mid-2009. But the process took time and not every rate cut led to an immediate decrease in mortgage rates. 

Auto loan rates can also be influenced by rate cuts, and the effect is often more immediate compared to mortgages. But factors like lender policies, borrower creditworthiness, and vehicle demand also play a role. 

That said, keep in mind that lower interest rates can lead to increased demand for homes and cars as financing becomes more accessible. This increased demand can drive prices higher, potentially offsetting the benefits of lower interest rates. For example, during 2020-2021, low mortgage rates contributed to a surge in housing demand, which pushed home prices to record highs in many areas. 

Refinance with caution

While refinancing can be a smart way to take advantage of lower interest rates, it’s not practical or cost-effective to refinance your mortgage after every rate cut. Instead, it’s important to assess when refinancing will truly benefit you financially, factoring in the costs associated with the process. The total costs of refinancing include closing costs, loan origination fees, and any prepayment penalties. Closing costs for refinancing typically range from 2-5% of the loan amount. 

Consider using a refinancing calculator to determine how much rates would need to fall to offset closing costs and other fees. Generally, if you can reduce your rate by 1% or more, refinancing might be worth considering, but this varies based on your specific situation. 

Personalized guidance for your financial strategy

As you consider the potential impact of a Federal rate cut, it’s essential to remember that every financial decision should be carefully tailored to your unique situation. This article provides an overview of what to keep in mind and how historical trends might guide your choices, but the specifics of your financial strategy might require a more nuanced approach. 

If you’re thinking about making any significant changes to your financial strategy, we strongly recommend seeking professional advice. Our office is here to provide personalized guidance and help you make informed choices. Contact us today to discuss how you can best position yourself to take advantage of upcoming changes and ensure your financial strategy remains strong.

September 03, 2024 | by Atherton & Associates, LLP

Smart financial planning for college: a parent’s guide

As parents, we all want the best for our children, including the opportunity for a higher education. But with the ever-rising costs of college, many families are concerned about how to afford it, especially those who are unlikely to qualify for need-based financial aid. 

We all know that a college education is a significant investment. Even in 2024, the average cost of a four-year public in-state degree can easily exceed $100,000. And that doesn’t include textbooks, supplies, and other incidental expenses. 

Our goal today is to explore how to effectively plan and save for your child’s education so they can pursue their dreams without being overwhelmed by debt. Whether your child is 5, 10, or 15 years away from starting college, it’s never too early or too late to start preparing. By developing a solid financial plan, you can ensure that when the time comes, your child has the opportunity to attend college without financial worry. 

In this article, we’ll provide step-by-step instructions to help you maximize your financial resources and support your child’s educational journey. 

Understand student aid and expected family contributions

Federal student aid eligibility is determined by various factors without a specific income cutoff. When you fill out the Free Application for Federal Student Aid (FAFSA), the information you provide determines the Student Aid Index (SAI). The SAI estimates how much your family is expected to contribute to your child’s college education based on your income, assets, family size, and the number of family members attending college. 

Here’s a rough breakdown of how it works: 

Family income: the SAI calculation considers your family’s AGI along with untaxed income and benefits like tax-exempt interest income and deductible retirement contributions. 

Allowances against income: several allowances are subtracted from your income for necessary expenses like federal and state taxes, payroll taxes, essential living expenses, and an employment allowance. 

Assets: the calculation also considers assets such as cash, savings, checking accounts, investments, business net worth, trusts, and education savings accounts. Child support received is also considered an asset. A nominal asset protection allowance is subtracted, which is based on the age of the older parent and whether the household has one or two parents. 

The total expected contribution is then assessed, much like taxes, at rates ranging from 22% to 47%. Some students can qualify for zero expected family contribution if their parents’ combined income is $29,000 or less. However, for many families, there is little likelihood of qualifying for zero expected family contribution. 

In a nutshell, most parents can expect to pay tens of thousands of dollars per year to send a child to college. Expected contributions are relatively high because non-liquid assets like business and investment net worth can affect your expected contribution. And the thresholds and requirements for need-based financial aid are particularly hard to meet. 

Consider a college savings plan as early as possible

With the cost of education steadily increasing, starting a dedicated savings plan early can make a substantial difference. Early savings benefit from compound interest, easing the financial burden when college bills start arriving. Even if you save more than needed, there are some ways to use excess funds. 

Types of college savings accounts

There are two main types of college savings accounts: Coverdell Education Savings Accounts (ESAs) and 529 plans. Both types of accounts allow your money to grow and be withdrawn tax-free, provided the funds are used for qualified educational expenses. If the funds are not needed for education, you can change the beneficiary to another family member. 

Coverdell ESAs

ESAs have a lower annual contribution limit of $2,000 per year per beneficiary. Contributions are phased out for joint filers with an AGI between $190,000 and $220,000. You cannot contribute to an ESA if your income exceeds that threshold. 

However, ESAs are versatile and can be used for a wide range of educational expenses, including K-12 schooling. Withdrawals are free from federal taxes if used for qualified expenses like tuition, books, tutoring, supplies, room and board,and  even computer equipment and internet service. If funds are used for non-qualified expenses, the earnings are taxable and subject to a 10% federal penalty. 

If your child earns a scholarship, the amount of the scholarship is deducted from allowable expenses. For example, if they have $10,000 in qualified expenses and receive a $4,000 scholarship, $6,000 can be withdrawn tax and penalty-free to cover remaining expenses. 

ESAs must be distributed by the time the beneficiary reaches age 30, but you can change the beneficiary to another family member under age 30 if excess funds remain. 

529 plans

529 plans have much higher contribution limits, varying by state. Generally, parents can contribute up to $18,000 per year in 2024 without triggering the federal gift tax and can front-load up to five years’ worth of contributions. 

Many states offer tax deductions or credits for contributions to their own 529 plans. Some states provide benefits for any plan, not just in-state plans. These states include Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania. 

529 savings can be used at any eligible college nationwide, and you can withdraw up to $10,000 per year for K-12 tuition. 

If your child receives scholarships that cover their education costs, you can withdraw an equivalent amount without penalty, though taxes will apply to the earnings.  

The good news is that your child can be the beneficiary of both a 529 plan and an ESA, allowing you to contribute to both accounts in the same year. 

Set goals to increase the chances of receiving merit-based scholarships

It’s not just about how you’re going to pay for college; it’s also about finding ways to reduce expenses so less money has to come out of your pocket. 

It’s important to get your child involved in the college planning process early. Their active participation is key to securing scholarships and managing future college expenses.

Strive for high grades

Encourage your child to aim for high academic performance. Merit-based scholarships often depend on GPA and standardized test scores. Emphasize that their efforts in middle and high school can greatly impact their college funding opportunities.

Participation in extracurricular activities

Participation in clubs, sports, and community service also enhances scholarship applications. Colleges look for well-rounded individuals who show leadership, commitment, and a willingness to give back to the community.

Parental support and motivation

As parents, your role is crucial in motivating and supporting your child. Work with your child to set achievable academic and extracurricular goals. Offer resources like tutoring, test prep courses, and access to extracurricular activities. And stay involved in your child’s academic life because faculty can often provide key information to ensure your child excels and has the best chance of receiving merit-based scholarships. 

Start the scholarship search early

Start looking for scholarships early in high school. This can give your child a competitive advantage by allowing more time to find and apply for various opportunities. 

For local scholarships, check with your child’s high school guidance counselor, community organizations, businesses, and civic groups. Local scholarships are often overlooked and have fewer applicants, increasing your child’s chances of winning. 

You can also search for national scholarships using online databases like Fastweb, Scholarships.com, and the College Board’s Scholarship Search. These platforms allow you to search for scholarships based on your child’s qualifications and interests. 

Junior year: consider a range of educational institutions

As your child reaches their junior year, it’s a good time to explore educational options and plan for college credits and costs. Encourage your child to take AP courses. These classes look good on scholarship applications and can earn your child college credits, saving time and money. 

Also, look into the financial benefits of staying in-state for college. In-state schools typically offer lower tuition rates, and some offer scholarships or grants for in-state applicants. 

Another cost-effective option is to have your child attend a community college for the first two years to complete general education requirements. Afterward, your child can transfer to a four-year institution to finish their degree. This pathway can offer significant savings on tuition and other expenses. 

Senior year: application and financial aid process

When your child enters their senior year, it’s time to focus on college applications and securing financial aid. Be sure to complete the FAFSA, even if you think your child won’t qualify for need-based aid. Many schools require the FAFSA for scholarship eligibility, including merit-based scholarships. Submitting it ensures your child is considered for all possible aid. 

At this point, your child should have identified several other scholarship opportunities. Keep them on track to ensure they finalize each application. It may help to create a checklist of all scholarships and their deadlines and gather necessary documents, like transcripts and letters of recommendation, in advance. 

Post-acceptance: understand and utilize available tax benefits

Once your child is accepted to college, it’s time to explore tax benefits that can help reduce the cost. Two key tax credits are the Lifetime Learning Credit (LLC) and the American Opportunity Tax Credit (AOTC). 

Lifetime Learning Credit

The LLC helps offset the cost of higher education for students in undergraduate, graduate, and professional degree programs, as well as courses to improve job skills. There is no limit on the number of years you can claim the credit. 

It’s worth 20% of the first $10,000, up to $2,000. For 2024, the credit is reduced if your AGI is between $160,000 and $180,000 if filing jointly. It cannot be claimed if your income exceeds these limits. 

American Opportunity Tax Credit

The AOTC offers more tax savings but can only be used by students in their first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. Up to $1,000 of the credit is refundable even if you owe no tax. Like the LLC, the credit is reduced if your AGI is between $160,000 and $180,000 if filing jointly. 

Plan ahead to ensure your child’s education is financially manageable

This article provides an overview of strategies for paying for your child’s education. If you’d like more personalized information and advice, please contact our office. We’re here to help you plan effectively and ensure your child’s college journey is financially manageable. 

August 05, 2024 | by Atherton & Associates, LLP

One of the most common questions taxpayers have about IRS audits is, “How far back can the IRS audit me?” Understanding the statute of limitations and the circumstances that may extend this period is crucial for maintaining proper tax records and ensuring compliance. 

In this article, we’ll provide an overview of audit timeframes and explain the legal and practical aspects of an IRS audit. 

Audit basics

An audit is a review or examination of an individual’s or organization’s financial information and accounts to ensure accuracy in reporting according to tax laws. The purpose of an audit is to verify the reported amount of tax. It does not always suggest a problem; sometimes, it can be a random selection or a computer screening based on a statistical formula. 

If you are selected for an audit, the IRS will notify you by mail, not by telephone. The audit can be managed either by mail or through an in-person interview to review your records. The length of an audit varies depending on the complexity of the issues, the availability of information requested, and your agreement or disagreement with the findings. 

The general rule: three-year statute of limitations

In most cases, the IRS has up to three years from the date you file your tax return to initiate an audit. This period starts from the date you filed your return (or April 15, whichever is later) to charge you additional taxes. For example, if you filed your 2020 tax return on April 15, 2021, the IRS generally has until April 15, 2024, to audit that return. If you requested an extension and filed your 2020 tax return in October 2021, the IRS would have until October 2024 to audit the return. 

In practice, however, the IRS tends to open and close an audit within 26 months after the return was filed or due. This internal policy helps ensure that the audit and other processing needs are completed within the three-year timeframe. 

However, these rules aren’t absolute, and the IRS can extend the audit period under certain circumstances. 

Exceptions to the three-year rule

While the three-year statute of limitations covers most situations, several exceptions extend this period:

• Substantial understatement of income: If you underreport your income by more than 25%, the IRS can audit you for up to six years. This rule aims to address significant discrepancies that could indicate tax evasion.

• Unreported foreign income: If you have unreported income from foreign sources exceeding $5,000, the IRS can audit you for up to six years. This extension is part of the IRS’s efforts to combat offshore tax evasion.

• Failure to file a return: If you fail to file a tax return, there is no statute of limitations. The IRS can audit you at any time, regardless of how many years have passed since the tax year in question.

• Fraud or willful evasion: In cases where the IRS suspects fraud or intentional tax evasion, there is also no statute of limitations. The IRS can investigate and audit your returns indefinitely to uncover fraudulent activities.

The timeframe also varies depending on the type of audit conducted by the IRS. Some audits, particularly those focusing on tax credits, start a few months after you file your return. Others, often related to questionable items on your return, generally start within a year after you file. The most comprehensive IRS audits, known as field audits, can start later. 

Practical tips for taxpayers

Dealing with the IRS in an audit can be challenging. Here are some practical tips to keep in mind: 

• Maintain records: keep all tax records, including receipts, bank statements, and other relevant documents, for at least seven years. This practice covers you for most audit scenarios, including the six-year extension for substantial underreporting.

• Accurate reporting: ensure all income is accurately reported on your tax returns. Double-check your numbers and consider professional help if your tax situation is complex.

• Respond promptly: if you receive an audit notice, respond promptly and provide the requested documentation. Delays or failure to respond can escalate the situation and result in penalties.

• Professional advice: consult a tax professional if you have concerns about past returns or potential audit risks. They can provide guidance tailored to your specific circumstances.

By understanding the IRS audit timelines and maintaining diligent records, you can reduce the stress and uncertainty associated with potential audits. Keeping accurate and comprehensive documentation not only ensures compliance but also provides peace of mind. 

For personalized assistance and to ensure your records are in order, reach out to one of our professional advisors. We can help you navigate complex tax laws and stay compliant and prepared for any IRS inquiries. 

June 17, 2024 | by Atherton & Associates, LLP

The IRS’s newly unveiled strategic operating plan is set to reshape the landscape for wealthy individuals, large corporations, and complex partnerships. By 2026, audit rates for these groups are projected to rise significantly. 

It’s important to understand and prepare for a more rigorous audit environment to safeguard your financial interests and ensure compliance with the evolving standards. In this article, we’ll provide insights and strategies to manage the impending changes.

Breaking down the IRS’s new audit plan

The strategic operating plan reflects the IRS’s enhanced capacity, driven by increased funding and resources, to address historically low audit rates among the wealthy. Here are the key points of the plan:

Wealthy individuals with income over $10 million

By 2026, individuals with income exceeding $10 million will experience a 50% increase in audit rates. While this sounds substantial, it’s important to note that the current audit rate for this group is relatively low. In 2019, only 11% of wealthy individuals faced audits. Under the new plan, this rate will rise to 16.5%, reflecting the IRS’s intensified focus on high-income earners who may have complex tax situations.

Large corporations with assets over $250 million

Large corporations are set to face a threefold increase in audits by 2026. Companies with assets exceeding $250 million will see their audit rates rise dramatically from 8.8% in 2019 to 22.6% in 2026. This shift underscores the IRS’s commitment to ensuring that large entities adhere to tax laws and accurately report their financial activities. 

Complex partnerships with assets over $10 million

Complex partnerships are also on the IRS’s radar, with audit rates expected to increase tenfold by 2026. Partnerships with assets over $10 million will see their audit rates jump from a mere 0.1% in 2019 to 1% in 2026. 

While these projected increases may seem daunting, it’s crucial to recognize that they come after years of relatively low audit activity due to budget constraints and limited manpower. The IRS’s enhanced resources now allow it to more effectively target these groups, ensuring compliance and closing the tax gap. Understanding these changes and preparing accordingly will be essential for those affected.

Actionable steps for those facing increased audit rates

With the IRS’s strategic plan set to increase audit rates, it’s crucial for those in the targeted groups to take proactive measures to mitigate audit risks. While these steps are not exhaustive or individualized, they offer a solid starting point for those facing increased audit risks: 

• Maintain thorough documentation. Ensure all income, deductions, and credits are well-documented. Keep meticulous records of all financial transactions and supporting documents.

• Review past returns. Conduct a thorough review of past tax returns to identify and correct any potential errors or omissions. This can help prevent issues during an audit.

• Conduct internal audits. Businesses should regularly perform internal audits to ensure compliance with tax laws and regulations. This can help identify and rectify any discrepancies before an IRS audit.

• Implement robust accounting systems. Invest in advanced accounting and reporting systems to ensure accurate and transparent financial records. This will make it easier to provide necessary documentation during an audit.

• Stay informed on tax law changes. Keep abreast of changes in tax laws and regulations that may affect you or your business. Ensure your tax strategies are aligned with current laws to avoid potential issues.

• Regularly review partnership agreements. Ensure that partnership agreements are up-to-date and clearly define each partner’s responsibilities and tax obligations. This can help prevent disputes and confusion during an audit.

• Respond promptly to IRS inquiries. If you receive an audit notice or any inquiry from the IRS, respond promptly and provide the requested information. Delays can lead to further scrutiny and complications. If you receive an audit notice or any inquiry from the IRS, respond promptly and provide the requested information. Delays can lead to further scrutiny and complications. If you receive any notices or inquiries from the IRS, contact our office for help with a response.

Preparing for the future

This article provides a brief overview of the upcoming changes in the IRS’s strategic operating plan and outlines some basic steps to consider. It is important to note that these recommendations are not exhaustive. For personalized advice and comprehensive guidance, please contact our office. 

June 15, 2024 | by Atherton & Associates, LLP

Donor-advised funds (DAFs) have steadily grown in popularity as a strategic way to manage charitable giving. In late 2023, the IRS proposed new regulations governing DAFs that could impact many existing funds. 

These rules aren’t set in stone yet, but their potential to apply retroactively makes it crucial to understand the core concepts now. In the meantime, taxpayers can continue to rely on the existing rules, but out of an abundance of caution, it makes sense to prepare for the impending changes. 

While several questions remain unanswered and further clarification is expected, we’ll provide a foundational overview of the proposed regulations to date. 

Evolution of DAFs

DAFs are a popular tool for charitable giving, allowing individuals and entities to donate to a fund managed by a public charity and, in turn, receive immediate tax benefits. The donors also retain advisory rights on how their donations are distributed and invested.

The concept of DAFs dates back to the 1930s, but their popularity surged in the 1990s. By 2022, these funds accounted for over 10% of all charitable giving in the U.S., with grants from DAFs surpassing $52 billion. 

It was only in 2006, however, that DAFs were formally recognized by the Internal Revenue Code. The lack of clear regulations led to varied interpretations and inconsistencies in administration. 

Proposed regulations

In November 2023, the IRS unveiled a set of proposed regulations that aim to provide a clearer operational blueprint for DAFs. These proposed changes, while not final, provide a glimpse into the future landscape of DAFs. The proposals still leave some questions unanswered, but they generally modify the definitions of eligible funds, donors, and donor-advisors.

The proposed regulations expand the definition of a DAF, considering factors beyond formal documentation, such as the fund’s financial activities and the sponsoring organization’s practices with donors. They also redefine a donor as any entity contributing to a fund but explicitly exclude public charities and governmental entities. A fund that received contributions solely from either of these entities would not be considered a DAF. 

The role of donor-advisors is also clarified, with the proposed regulations stating that anyone with authority over a DAF’s distributions or investments is considered a donor-advisor. This includes personal investment advisors who manage both the assets of a DAF and those of a donor, a designation that could have significant tax repercussions. Notably, an investment advisor is not considered a donor-advisor if their advisory services extend to the sponsoring organization as a whole rather than being limited to specific DAFs. If an advisor provides personal investment advice for a specific DAF, compensation paid to the advisor will be considered an automatic excess benefit transaction subject to excise taxes. 

Implications

It’s important to recognize that these guidelines are preliminary and subject to refinement. Despite their proposed status, the implications are potentially significant, so it’s wise to take a proactive stance in anticipation of the impending changes. 

While these regulations are still provisional, they will extend retroactively to the entirety of the tax year in which they are finalized. Should the regulations become official anytime in 2024, they would apply to the entire 2024 tax year. This potential retroactivity underscores the importance for sponsoring organizations to reassess their policies and donor lists promptly. 

To prepare for the upcoming changes, sponsoring organizations should conduct thorough reviews of their existing funds. This can help them determine if other charitable funds will now be considered DAFs. For instance, field of interest funds or fiscal sponsorship arrangements may now be recognized as DAFs if the donor has advisory privileges regarding distributions. 

The changes to the definition of a donor-advisor deserve careful review and planning. If an investment advisor provides personal investment guidance for specific DAFs (as opposed to guidance for the sponsoring organization as a whole), the fund could face hefty excise taxes on the distribution. The advisor could also be required to correct the excess benefit transaction by returning the compensation, with interest, to the sponsoring organization. If not corrected, the advisor could face an additional tax of 200%. As such, sponsoring organizations that permit a donor to recommend an advisor for their DAF need to exercise caution, especially if that advisor also manages the personal assets of the donor. 

Additionally, the proposed regulations extend the scope of eligible distributions to include payments for services necessary to carry out an organization’s charitable purposes. For instance, a DAF may make a direct payment to a service provider for services performed on behalf of the charitable entity. However, the sponsoring organization should maintain thorough documentation showing that the direct payment was non-taxable. 

Preparing for the future

The proposed regulations are awaiting public comment before finalization, and it’s likely that more guidance will follow. In the meantime, sponsoring organizations should meet with legal and tax professionals to prepare for the upcoming changes. These professionals can help you understand the new regulations and revise your policies to ensure compliance.

Please note that this article provides a brief overview of the IRS’s proposed regulations and is not intended as legal advice. Many questions remain unanswered, and the regulations could be subject to change. Consider this overview as a starting point for a more in-depth exploration with your advisors. 

If you have any questions or would like personalized guidance, please contact our office. 

May 03, 2024 | by RSM US LLP

Executive summary: The IRS has released its annual update, in which it pledges to triple its audit rates on large corporations.

The update states that the IRS will nearly triple audit rates on large corporations—those with assets over $250 million. The audit rate on such corporations was 8.8% in 2019. Under the plan, the audit rate would be 22.6% by 2026. Audit rates on other large business entities would increase exponentially as well. Large corporations should take note of the IRS’s increased audit focus and document any tax position or corporate transaction that might be questioned upon audit.

On May 2, 2024, the IRS released an update on the Strategic Operating Plan, its blueprint outlining its implementation of the Inflation Reduction Act (IRA). The annual update and accompanying supplement focus on recent and future contemplated changes as a result of the funding provided by the IRA.

Per the updated plan, the IRS will nearly triple audit rates on large corporations—those with assets over $250 million. The audit rate on such corporations was 8.8% in 2019. The IRS plans to increase audit rates on these corporations to 22.6% by 2026.

The updated plan also states the IRS will increase audit rates on large, complex partnerships to 1%, up from a tenth of a percent. The IRS will also increase audits on individuals earning more than $10 million—from a rate of 11% in 2019 to 16.5% in 2026.

Large corporations—as well as other large business entities—should take note of the IRS’s increased audit focus. Due to the increased probability of an audit, we recommend that taxpayers contemporaneously document any tax position or corporate transaction that might be questioned upon audit.

April 30, 2024 | by RSM US LLP

Executive summary: Distribution options

Employers establish retirement plans to provide a vehicle to set aside monies, whether funded by the employee or the employer, to be preserved for a retirement benefit. The rules related to when an employee can take a distribution from their retirement plan account are restrictive considering the goal of preserving the retirement funds. SECURE 2.0, enacted on Dec. 29, 2022, included provisions that loosen some of the restrictions on withdrawals from a retirement plan. The additional options available give plan sponsors flexibility in choosing what to offer their employees.

In general

There are a few general concepts to keep in mind as we dive deeper into some of the provisions added by SECURE 2.0.

1. A plan sponsor has discretion as to whether and how these optional plan provisions will be incorporated into the plan.
2. All the distribution provisions discussed are exempt from the 10% tax on early withdrawals (i.e., before age 59½) from a retirement plan. However, the amount withdrawn is still subject to income tax.
3. While income tax applies, there is the ability for an individual to recoup taxes, and restore their retirement savings, by re-contributing to the plan some or all the amounts withdrawn within three years of distribution.
4. The provisions can be made available to any plan participant, not just a current employee.

Domestic abuse

A survivor of domestic abuse often needs access to additional funds to assist in escaping or recovering from an unsafe situation. “Domestic abuse” for this purpose is defined in SECURE 2.0 as: “physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.” The survivor must certify that they experienced domestic abuse within the last year to receive a distribution that is no more than the lesser of $10,000 (for 2024, as indexed) or 50% of the survivor’s vested plan balance.

This distributable event became available, after Dec. 31, 2023, for implementation by an IRC section 401(a) defined contribution plan (including 401(k), but not money purchase pension plans), 403(a) annuity plan, 403(b) plan and a governmental 457(b) plan, as well as individual retirement accounts (IRAs).

Emergency personal expense

Unforeseen emergency situations that require immediate financial resolution are a common occurrence. This distributable event allows up to $1,000 of the participant’s plan account to be withdrawn. To receive the distribution, the participant must certify that they have an expense for themselves or a family member that is an immediate financial need. Only one such distribution can be issued in a calendar year. Another personal expense distribution cannot be issued in the three calendar years following the year of distribution unless the withdrawn amount is repaid to the plan or contributions made by the participant to the plan after the distribution are at least equal to the amount distributed.

Many plans already provide hardship distribution options for employees. However, the circumstances under which a hardship distribution can be issued are limited. For example, an employee’s car may require a $750 repair, which would not fall under one of the safe harbor reasons for hardship distribution. However, the employee could use the emergency personal expense provision to take a distribution to cover the $750 repair.

This distributable event became available, after Dec. 31, 2023, for implementation by an IRC section 401(a) defined contribution plan (including 401(k), but not money purchase pension plans), 403(a) annuity plan, 403(b) plan and a governmental 457(b) plan, as well as IRAs.

Federally declared disasters

Repeatedly, Congress has enacted legislation after disasters (e.g., hurricanes, floods, wildfires) providing individuals the opportunity to take a penalty-free distribution or loan from their retirement plan accounts to assist them as they rebuild their lives. In lieu of the disaster-by-disaster approach, Congress enacted permanent rules for distributions and loans related to federally declared disaster areas.

Key features of the new distribution provision are:

• A participant can request a distribution of up to $22,000 up to 180 days after the date of the disaster.
• The individual must have sustained an economic loss in relation to the disaster and must have a principal place of residence located in the disaster area.
• The tax effect of the amount withdrawn can be spread over three years rather than the entire amount being taxable in the year withdrawn.

Key features of the new loan provision are:

• The maximum dollar amount that can be made available is the lesser of 50% of the individual’s vested plan balance or $100,000 (increased from $50,000 under the normal loan rules).
• Loan repayments, whether on an existing loan or one taken because of the disaster, owed between the date of the disaster and up to 180 days after the disaster can be delayed for one year.

These provisions became available for disasters after Jan. 26, 2021, and can be implemented by an IRC section 401(a) defined contribution plan (including 401(k) plans), 403(a) annuity plan, 403(b) plan, and a governmental 457(b) plan, as well as IRAs.

Terminal illness

This provision was not added as a distributable event, but rather just as an exception to the early withdrawal penalty. Therefore, it only applies when a distribution is issued under another plan provision. The intention was to have this be an optional plan distributable event. There has been a technical corrections bill drafted that would address this, as well as some other SECURE 2.0 provisions, but it has not yet been finalized.

IRS Notice 2024-2 provides guidance on terminal illness distributions in the form of Q&As. The guidance confirmed the following:

• A terminally ill individual is one who has an illness or physical condition that a physician has certified is expected to result in death in 84 months or less. The 84 months is measured from the date of certification.
• Certification must be obtained prior to the distribution and contain specific information (e.g., the name and contact information of the physician, a narrative description to support the conclusion that the individual is terminally ill, the date the physician examined the individual, etc.) as outlined in Notice 2024-2.
• Only the physician’s certification must be provided to a plan administrator to support the distribution. However, the individual should retain appropriate underlying documents to support their distribution and as part of maintaining complete tax records.
• Generally, there is no limit to the amount that can be treated as a terminal illness distribution. However, distributions cannot be made solely because of a terminal illness. Therefore, the participant must qualify for a distribution based on another plan provision, and any limits applicable to the distributable event being utilized to issue the distribution would have to be considered. For example, a plan may allow in-service distributions, but it might cap such distributions to $10,000.

The provision became available after Dec. 29, 2022, for distributions from IRC section 401(a) defined benefit and defined contribution plans (including 401(k) plans), 403(a) annuity plans, and 403(b) plans, as well as IRAs.

Takeaway

Legislators see that employees have unexpected financial needs arise for which they need a source of funds. The only source, for some employees, with an amount sufficient to assist with the need is retirement plan savings. Relaxation of the distribution rules to provide an employee with a current source of funds may negatively impact the individual’s financial position in retirement overall but may also help encourage participants to contribute to their retirement plans by alleviating fears that their funds are not accessible when needed under extenuating circumstances. The opportunity is available for an employee to restore their retirement account by re-contributing the distribution taken, but how many individuals will avail themselves of this opportunity? Employees contemplating one of these distributions should consider 1) other sources of income that may be available to assist with the financial need, 2) the current tax ramifications of the withdrawal, and 3) how the reduction to their account balance will affect them in retirement.

April 29, 2024 | by RSM US LLP

Many people want their loved ones to inherit their home after they are gone. However, leaving the value of your home in your estate can contribute to a high estate tax bill. Qualified Personal Residence Trusts (QPRT) can be a valuable tool to make a lifetime transfer of your home to your family, still enjoy the home during your life, and potentially reduce your estate taxes.

What is a QPRT?

A QPRT is an irrevocable trust designed to reduce the amount of gift and estate taxes typically incurred when transferring a personal residence to beneficiaries. By transferring your home into a QPRT, you can continue living in it for a specified term while passing it on to your heirs at a reduced transfer tax cost. The essence of a QPRT lies in its ability to freeze (for estate tax purposes) the value of your home at the time of the trust’s creation, potentially shielding any future appreciation from estate taxes.

What are the requirements for establishing a QPRT?

• Generally, the personal residence must be the sole asset of the trust.
• You decide on a fixed term (e.g., 5, 10, 20 years) during which you retain the right to live in the home. After this term, the residence passes to the beneficiaries designated in the trust. You may live in the home after the term, but you must pay rent to retain the estate tax advantages.
• Once established, the terms of the QPRT cannot be altered, and residence cannot be taken back

What are the benefits of setting up a QPRT?

• When you transfer your home into a QPRT, the value of the gift used for gift tax reporting purposes is calculated based on the current value of your home minus the value of your retained interest in living there for the term of the QPRT. Thus, the value of the gift is less than an outright gift.
• Any appreciation in your home’s value during and after the term occurs outside of your estate, potentially saving on future estate taxes. 
• Payment of rent after the term is not considered a gift to the other QPRT beneficiaries.
• If necessary, the residence can be sold while it is owned by the QPRT.

What are the potential downsides of setting up a QPRT?

• If you die during the QPRT term, the entire home is included in your estate.
• Transfers made during life generally mean a carryover basis for your beneficiaries, leaving them with the burden of potential capital gains if they sell. If a QPRT is not utilized and the asset is included in your estate, there may be a step-up in basis, potentially avoiding capital gains.
• The payment of rent after the term can cause additional complications, such as determining the fair market rent, cash flow issues for the renter, or disagreements among family members.
• QPRTs may not be an efficient tool for multigenerational transfers because you cannot allocate your available generation-skipping tax exemption to the transfer until the end of the term, when values have likely increased.
• You must file a gift tax return and obtain a professional appraisal to establish the transferred interest’s value for transfer tax purposes.

Is a QPRT right for you?

QPRTs offer a strategic way to pass a valuable asset to your loved ones. However, the decision to use a QPRT requires careful consideration of its benefits and limitations. In addition, it is important to properly administer QPRTs to avoid IRS scrutiny. By understanding the requirements, advantages, and potential downsides, you can make an informed decision about whether a QPRT is right for your estate planning needs. As always, consult with your RSM tax advisor to tailor a strategy that best suits your situation and goals.

March 25, 2024 | by RSM US LLP

Executive summary: Credits for retirement plan sponsors

Continued concerns by congressional leaders for employees to attain retirement security have led to legislative changes intended to make it more affordable for certain employers to sponsor a retirement plan. Non-refundable credits were already in place to help employers offset the administrative cost of implementing and maintaining a retirement plan, but the SECURE 2.0 Act of 2022 (SECURE 2.0) enhanced an existing credit and introduced new start-up and military spouse credits to incentivize plan sponsors to maintain plans and make their setup and operation more feasible. SECURE 2.0 also provides plan sponsors the ability to use de minimis financial incentives to entice employees to elect to defer. The IRS provided additional guidance on these credits and financial incentives in Notice 2024-2.

Startup plan tax credits

Small employer pension plan startup cost tax credit

SECURE 2.0 expanded the already available small employer pension plan startup cost tax credit to make implementing a retirement plan more attractive to a small employer. A small employer in this context is an employer with 100 or fewer employees who earned at least $5,000 in the prior tax year. Employees of employers related to the sponsoring employer under the controlled and affiliated service group aggregation rules are considered for this purpose. Historically, small employers could claim a nonrefundable credit for 50% of the cost to set up and administer a retirement plan, up to a maximum of $5,000. Costs paid by the employer, not the plan, are considered for purposes of the credit. The credit has been increased to 100% for employers with 50 or fewer employees earning at least $5,000 in the prior tax year, beginning in 2023. The 50% credit still applies for employers with 51 to 100 employees. Generally, the credit can be claimed for the first three years the plan is in operation. Amounts claimed towards the credit cannot also be deducted as an expense on the employer’s return. The employer can elect whether it takes the credit each year, so if an employer does not claim the credit for a given year, the costs may be deducted. Since the credit is nonrefundable, it is not beneficial for tax-exempt and governmental employers.

Additional credit for employer contributions

Small employers who meet the criteria of the small employer pension plan startup cost tax credit also have the opportunity to receive an additional credit for employer contributions (e.g., profit-sharing or match) made to a new defined contribution plan, for taxable years beginning after Dec. 31, 2022. The credit, which is available for up to five years, is 100% of employer contributions (up to $1,000 per eligible employee) in the year a plan is established and the next, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. For an employer with more than 50 employees in the prior year, the credit is reduced two percentage points for each employee in excess of 50 (i.e., if the employer had 60 employees, the credit would be reduced by 20%). Contributions to employees with more than $100,000 in compensation cannot be taken into account for the credit. Even with the limitations on this credit, it provides a potentially significant tax savings opportunity for small employers.

Auto-enrollment credit

Although not new with SECURE 2.0, another credit to keep in mind is the auto-enrollment credit, which allows a $500 credit for a three-year period, beginning in the year a small employer implements an auto-enrollment provision in their retirement plan. Auto-enrollment is a provision that enrolls eligible employees into a retirement plan at a specific deferral rate, unless the employee elects a different deferral rate or not to defer.

Summary

To conceptualize the credits potentially available, consider a 401(k) plan with an auto-enrollment provision effective in 2022 by an employer with less than 50 employees in every year.

	Tax year	Credit for Startup Costs	Credit for Eligible Employer Contributions	Credit for Auto Enrollment
1st Credit Year	2022	50% up to $5,000	n/a	$500
2nd Credit Year	2023	100% up to $5,000	100%	$500
3rd Credit Year	2024	100% up to $5,000	75%	$500
4th Credit Year	2025	n/a	n/a	50%
5th Credit Year	2026	n/a	25%	n/a

Military spouse credit

A new credit, effective for taxable years beginning after Dec. 29, 2022, was born out of concern for military spouses who may not be able to participate in a retirement plan or may not become vested in their employer account within a retirement plan due to the need to frequently relocate. During each of the first three years in which a non-highly compensated military spouse participates in a defined contribution plan, SECURE 2.0 provides a tax credit of $200 for the military spouse’s participation plus an added credit of up to $300 for employer contributions made to the plan on behalf of the military spouse, subject to certain conditions. Conditions that must be met to qualify for the credit are:

• The military spouse must be allowed to participate in the plan within two months of employment.
• The military spouse must be immediately eligible for employer contributions at a rate at least as favorable as an employee who is not a military spouse would receive after two years of service.
• Employer contributions to the military spouse are immediately fully vested.

Small employers should keep in mind that the credit is based on each military spouse’s first three years of plan participation. Since each spouse could have a different three-year period, tracking the credit available for each year will require appropriate administrative measures.

Financial incentives for participants

Employers of all sizes often look for ways to increase the number of employees who elect to defer to a retirement plan. Historically, this has been in the form of targeted communication campaigns and financial literacy education of eligible employees. Beginning in 2023, SECURE 2.0 provided a new tool employers can use to entice employees to elect to defer. A de minimis financial incentive (not paid for with plan assets) can be offered to eligible employees who make a deferral election, provided they do not already have an election to defer on record.

In Notice 2024-2, the IRS noted a financial incentive will be considered de minimis if it does not exceed $250 in value. For example, as noted in the guidance, “if an employer announces on Feb. 1, 2024, that any employee for whom an election to defer under a CODA is not in effect on that date and who, within the next 90 days, makes an election to defer, will receive a $200 gift card, then the gift card is a de minimis financial incentive…”

Unless an exception is provided under the Internal Revenue Code, the financial incentive is considered includable in an employee’s wages and is subject to applicable employment tax withholding and reporting. For example, a gift card is a cash equivalent and considered to be a taxable fringe benefit. Therefore, no exception is available in this example and the value of the gift card is taxable compensation to the employee.

Takeaway

SECURE 2.0 expanded opportunities for employers to establish and operate retirement plans, especially for small employers. There are nuances involved in determining whether the credits are available and how the credit amounts are calculated. For example, specific criteria are applied to determine who is an eligible employer, how compensation is determined for the thresholds discussed, and to which years the credits can apply. RSM US can assist in evaluating credits or financial incentives available to employers sponsoring retirement plans, as well as for consulting on other retirement plan matters.

Stay tuned for other retirement plan topics each month and check out our previous article, Retirement plan audit and contribution considerations.