July 2023 Tax Tips and More
Upcoming dates:
July 16
- National Ice Cream Day
July 23
- Parents' Day
As the temperatures reach the highs that come with summer, so too is the peak impact of inflation. As in past months, topics continue to focus on ways to fight these trends.
. There is an article discussing the impact of the increasing federal interest rate and what it means to you. Plus an interesting read for small business owners to help identify and plan for unexpected expenses.
But this month is lead off with answers to common tax questions. Included here are five of the most common including whether those free airline miles on credit cards are taxable or not.
As always, please feel free to pass this newsletter to anyone who may find it valuable and call if you have any questions or concerns.
Common Tax Questions
What everyone is wondering
During tax season, there are a number of areas that generate questions. Here are five of the most common and their answers. But like most things, there can be exceptions, so if in doubt always ask for help.
Are my miles earned on my credit card taxable? Taxation of any extras you earn with a credit card – including miles, discounts, even cash back – are not taxable if you had to pay to get them. Other rewards that you receive, for example a reward for signing up for a card or for referring a new cardholder, are considered taxable income per the IRS.
Does my employer contribution count towards the 401(k) limit? Your employer’s matching contributions do not count toward your maximum contribution limit, which for this year is $22,500. If you’re 50 or older, you can sock away an additional $7,500 (for a total of $30,000) this year.
What happens to loans from my retirement account if I change jobs? When you switch jobs, you must pay back any loans borrowed from your employer-sponsored retirement account within a short amount of time. If the loan isn't paid back, the outstanding balance is considered a distribution that is subject to income taxes and an early withdrawal penalty.
Do I really need to report gifts given to people? Yes, but only if you give more than $17,000 ($34,000 if married) in 2023 to any one person. It must be reported to the IRS on a gift tax return. That's because the IRS keeps track of gifts you're allowed to make over the course of your lifetime, which in 2023 is $12,920,000 ($25,840,000 if married). Only after reaching this lifetime dollar amount will you need to actually make a gift tax payment.
Do I have to report a loss? You may think the IRS isn't interested in losses you incur, such as when you sell a stock at a loss or if your business loses money. The reality is that you should always report losses on your tax return because you can use them to offset income under certain conditions. In addition, most losses can be carried forward to future years to offset income.
Have your own question? Reach out. The answer could surprise you.
Prepare Your Finances for More Interest Rate Hikes
Financial experts are bracing for more interest rate hikes by the Federal Reserve over the remainder of 2023. Any interest rate revision - either increasing or decreasing - can cause a ripple effect throughout the economy. Accordingly, the Federal Reserve's actions will probably exert at least a moderate influence over financial choices you may make at home and in your business in 2023.
Here are several ways that you could be affected by interest rates that are continuing to trend upward.
Savings and debt
As a consumer, you stand to gain from rising interest rates because you’ll likely earn a better return on your deposits. Over the last ten years, placing your money in a certificate of deposit or passbook savings account has been hardly more profitable than stuffing it under a mattress. On the other hand, the cost of borrowing money will likely increase. As a result, mortgages, car loans, and credit cards will demand higher interest rates. That’s not a big deal if you’re already locked into low-interest fixed-rate loans. But if you have a variable rate loan or carry balances on your credit cards, you may find your monthly payments starting to increase.
Investments
On the investment front, market volatility may continue because rate increases are not completely predictable. Market sectors will likely exhibit varied responses to changes in interest rates. Those sectors that are less dependent on discretionary income may be less affected – after all, you need to buy gas, clothes, and groceries regardless of changes in interest rates.
As you adjust your financial plan, you might only need to make minor changes. Staying the course with a well-diversified retirement portfolio is still a prudent strategy. However, you may want to review your investment allocations.
Your Business
Rising interest rates can also affect your business. If your company’s balance sheet has variable-rate debt, rising interest rates can affect your bottom line and possibly your plans for growth. As the cost of borrowing increases, taking out loans for new equipment or financing expansion with credit may become less desirable.
Please call if you have questions about deciding on the most beneficial response to potential future changes in interest rates.
Surprise Bills: Prepare Your Business for the Unexpected
Getting a bill for an unexpected expense can put a dent in your business’s cash flow. Here are some tips your business can use to handle these unforeseen bumps in the road.
Stick to a reconciliation schedule. Know how much cash you have in your bank account at any given time. This is done by sticking to a consistent bank reconciliation schedule. Conventional wisdom suggests reconciling your bank account with bills paid and revenue received once a month, but you now have the ability to reconcile your cash every day. Perpetual reconciliation is easier to do if your business has fewer transactions. It may seem a bit much, but with the correct team in place, you will be prepared for surprises as they happen.
Create a 12-month rolling forecast. This exercise projects cash out twelve months. Each new month you drop the prior month and add another month one year out. This type of a forecast will reflect the ebbs and flows of cash throughout the year and identify times that you'll need more cash, so when a surprise bill shows up, you know exactly how it will impact your ability to pay it. If you have lean months, you may wish to explore creating a line of credit with your bank to be prepared for any surprises.
Build an emergency fund. Getting surprised with an unexpected business expense isn’t a matter of if it will happen, but when. Consider setting money aside each month into an emergency fund to be used only in case of a significant expense. A longer term goal could be to save enough money to cover 3 to 6 months of operating expenses.
Partner with a business advisor. Even small businesses sometime need help keeping their cash flow in line and avoiding unexpected expenses. Please call if you have any questions about organizing your business’s cash flow and preparing for surprises.
Budgeting Basics
During inflationary periods, it is harder to balance your income with the rising cost of housing, food, fuel, health care and insurance. One of the biggest tools to fight raising costs is creating a budget and measuring it throughout the year. Here are some suggestions to help create a budget that actually works.
Keep it simple. It's not necessary to have 50 different expense categories to classify your transactions. Having a simple budget makes it more likely that you stick with it over the long term. So take a look at your bank account and identify the big things. Revenue is pretty straight forward. Expenses are more difficult, so identify the main categories and get a monthly read on them.
Create annually, but manage monthly. See the full year budget as a destination, and your monthly financials as a journey to that destination. That way if you have a bump in the road, you will see other pathways to get to where you want to be at the end of the year. When you are done here, you should have a monthly budget, with full year goals.
Remember to budget for savings. If everything is working well, you have enough money left over at the end of the month to build your net worth. So consider adding a percent of your income in your budget for saving and investing. This will help you build your net worth over time and help fund for emergencies.
Account for taxes. Paying your tax bill may be one of your biggest expenses every year. Schedule several tax planning sessions throughout the year to figure out how much you should be saving every month to pay your federal, state and local tax bills. Then put this dollar amount in your monthly budget.
Remember to have fun. Having a budget doesn't mean you can't spend money. It simply means that you're intentional about it by planning your spending before it happens and ensure it is not out of hand.
Please call if you have questions about creating a budget or want a review of your tax obligation.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.
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