Tax Archives | Page 7 of 13

Traditional Vs. Roth IRAs: Key Differences

05 Aug 2021
SDG Accountants
Accounting, Tax
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Many individuals take retirement for granted; the idea of no longer being useful to the industry in which you worked for years is ridiculous to consider. That emotion is unavoidable. You’re forced to abandon a field that used to be your passion when you were younger. After you retire, you’ll need a source of money to keep you afloat. Even in your 70s, after working your entire life to secure your future, you should not be required to work. Your best option is an automatic source of income, which you can obtain if you begin working for it as soon as you begin your profession. Individual Retirement Accounts (IRAs) are the best option for your financial future. In every manner, it’s correct. Many Americans begin saving in Individual Retirement Accounts (IRAs) as soon as they begin their careers since it is the most advantageous option. Traditional IRAs and Roth IRAs are the two most popular IRAs in the United States.

The Employee Retirement Income Security Act (ERISA) of 1974 established the Traditional IRA. On the other side, Sen. William Roth introduced the Roth IRA 23 years later, in 1997. The sponsors’ name was then added to the IRA. We’ll go through all the important distinctions so you can figure out which IRA is best for you.

Tax Breaks:

Traditional IRAs and Roth IRAs both offer the same tax breaks, but they do not allow individuals to pick when they can claim their payments. Let’s start with the traditional IRA. The traditional IRA reduces your taxable income by collecting tax before making a payment to you. Traditional IRA contributions are taxable on both the state and federal levels for the tax year in which they are made. The money you get when you retire, as well as any withdrawals, are all taxed at your marginal tax rate. All of this lowers your Adjusted Gross Income (AGI), making you eligible for various tax benefits such as the child tax credit.

Moving on to Roth IRAs, they deduct taxes from your contributions at the time of contribution, thus your AGI for that year will not be reduced. This strategy has the advantage of not requiring you to pay any taxes when you withdraw your money in retirement. Because you paid the tax when you made the contributions, your future will be tax-free.

To put it another way, with a traditional IRA, you pay taxes when you withdraw money at retirement, whereas with a Roth IRA, you pay taxes when you make contributions, so your withdrawals are tax-free.

Income Limits:

There are also income limits for both retirement accounts; you will be able to choose your retirement account based on your income. However, this is merely a restriction for one account; anyone with an earned income of any amount can contribute to a traditional IRA. Different tax rates may apply.

Roth IRAs, on the other hand, have income eligibility requirements. In 2020, singles must have a MAGI of less than $139,000, with payments phasing off at $124,000. Married couples must have modified AGIs of less than $206,000 to contribute to a Roth, and contributions begin to phase down at $196,000.

In 2021, singles must have a MAGI of less than $140,000, with contributions phasing off at $125,000. Married couples must have adjusted AGIs of less than $208,000 to contribute to a Roth, and contributions begin to phase out at $198,000.

IRAs Withdrawal Rules:

Another significant distinction between a regular IRA and a Roth IRA is that the contributors’ withdrawal criteria are different. Traditional IRAs require Required Minimum Distributions (RMDs), which are taxable withdrawals of a percentage of your savings that must be taken by the age of 72, even if you don’t need the money. The IRS provides a worksheet on their website to assist contributors in determining their annual RMD. The estimate is based on your age and the amount of money you have.

Roth IRAs, on the other hand, do not force you to take any RMDs and do not even compel you to withdraw your money at any point throughout your life. It is not necessary or essential to take any money out because there is no tax at the time of withdrawal.

There are numerous more important distinctions between traditional and Roth IRAs; to learn more about which account is right for you, call your Miami Tax Accountant now. Excellent guidance at a minimal cost.

The Complete Guide to Inheritance Taxes

03 Aug 2021
SDG Accountants
Accounting, Tax
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Many people in the United States wonder if they have to pay taxes on inheritances. Let us begin by defining what inheritance is. An inheritance is a gift from a deceased person; a relative, or a friend. If you have received an inheritance, you may now be subject to three types of taxes. Inheritance tax, capital gains tax, and the estate tax would be the three taxes.

Inheritance Tax: An inheritance tax is a tax levied on a decedent’s property.

Capital Gains Tax: After the property you inherited has been sold, you must pay a capital gains tax. The tax would be levied on the selling earnings rather than the property itself.

A tax on the value of the inherited property is known as an estate tax. The estate, not the heirs, would be responsible for this tax. It may potentially lower the inheritance’s worth.

Inheritance Taxes at the Federal Level:

The Internal Revenue Service (IRS) is more concerned with capital gains tax than with all other sorts of inheritance taxes. Inheritances aren’t often subject to income taxes, and the federal government doesn’t levy one either. In many circumstances, inheritances are made in cash, such as your cousin leaving you $30,000 in cash, which is tax-free because it is not considered income.

Inheritance Taxes at the State Level:

Only 6 of the 50 states in the United States collect inheritance taxes; if you don’t live in one of these states, you won’t have to worry about inheritance taxes. Iowa, Kentucky, Maryland, Nebraska, and New Jersey are the six states that collect inheritance taxes. Even if you live in one of the six states, you can consider yourself tax-free as long as the decedent lived in one of the other 44 states. It’s also possible that property was left to an alive spouse, which would be exempt from inheritance taxes in all 50 states of the United States. Only Nebraska and Pennsylvania would levy an inheritance tax if the property was left to the decedent’s children or grandchildren.

Income Taxes for Inheritance at the State and Federal Level:

As previously stated, inheritance property is not considered taxable income and hence is not subject to income taxation. Depending on the sort of property you inherited, you may be required to pay some built-in income taxes.

Capital Gains Tax:

Capital gain is the difference between the asset’s worth and the amount you sell it back for. Because the capital gain is taxable income, you will have to pay capital gains tax to the IRS when you sell the inheritance property. If, on the other hand, the inheritance was sold for less than its worth, it will be regarded as a capital loss, and so no capital gains tax will be due.

For inheritance properties, the IRS imposes a different tax bracket than for regular income. This benefits taxpayers who are subject to capital gains tax as a result of the sale of their inherited property. Keep in mind that capital gains are calculated using the asset’s value on the day of the decedent’s death, not the asset’s worth when it was first purchased. This is beneficial to the taxpayer because they will have to pay fewer taxes.

State and Federal Level Estate Taxes:

Your inheritance property may be subject to state and federal estate taxes. The federal estate tax exemption is $11.4 million as of 2019. If an estate’s worth is less than this, there will be no estate tax. As of 2021, the District of Columbia and 12 other states also impose a state-level estate tax. Connecticut, Maine, Maryland, Hawaii, Washington, Rhode Island, Massachusetts, New York, Oregon, Minnesota, Vermont, and Illinois are the twelve states. If the inherited property is located in one of these states, you will be subject to state estate taxes.

If you do not live in one of those 12 states or the District of Columbia, the state’s estate tax will only apply if the exemption amount is surpassed. On the other hand, state-level exemptions are substantially lower than federal exemptions, with some states offering exemptions as low as $1 million.

Keep in mind that state-level estate taxes will be due and paid before you receive your inheritance.

Contact your Downtown Miami Tax Accountant for help with your inheritance taxes. Book a consultation using the in below or contact SDG Accountants by phone: +1 (786) 706-5905 or by email: admin@sdgaccountant.com.

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IRS CARES Act and Tax Implementations

30 Jul 2021
SDG Accountants
Tax
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The world has altered dramatically in the last year and a half. Many small businesses and individuals suffered financially and emotionally as a result of the virus. Staying away from family, not being allowed to meet relatives, being locked up in a house where your mental health is constantly jeopardized, and not being able to eat at your favorite neighborhood pizza place. Everything seemed to be going wrong. Small enterprises failed because they lacked the resources to stay afloat when the world was collapsing around them. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was one of many attempts by the U.S. government to assist these individuals and small businesses financially. However, now that tax season is here, those Americans must determine whether their plan was taxable. We’ll go over some of the major US government programs and see if they’re taxable or not.

We’ll go over the four CARES Act relief programs: Paycheck Protection Program, Economic Injury Disaster Loans, Employee Retention Credit, and Payroll Tax Postponement in order to assess your taxes. Depending on your type of business and situation, these scenarios may vary. Contact your Miami Tax Accountant, SDG Accountants, if you have a question concerning your business that isn’t answered in this article.

Is CARES Act Aid Taxable?

Many taxpayers have wondered whether or not the CARES Act they received is taxable. It is dependent on the program. Here’s a rundown of several of the CARES Act’s programs, along with whether or not they’re taxable.

Paycheck Protection Plan (PPP):

The Paycheck Protection Plan (PPP) is a small business loan program established by the United States government in 2020 as part of the Coronavirus Aid Relief Economic Security Act (CARES Act) to assist small businesses, self-employed workers, sole proprietorships, and other businesses in paying their employees. Owners of small businesses might borrow up to $10 million, or 2.5 times their average monthly payroll. If you followed all of the loan’s terms, the PPP might be considered a grant, and your loan could be forgiven. Your PPP will not be taxable income if this happens. If your loan is not forgiven, it will be treated as a regular loan and will not be taxed. This is only for tax purposes at the federal level.

It differs based on whatever state you live in when it comes to state taxes. For example, forgiven PPP loans are taxed in Florida; they are either included in taxable income or are not allowed as an expense deduction.

Economic Injury Disaster Loans (EIDL):

Another option under the CARES Act is the Economic Injury Disaster Loans (EIDL), which is an enlargement of a long-running BA loan program that assists persons who are financially impacted by the coronavirus. During the spring and summer of 2020, small businesses could apply for a loan of up to $2 million utilizing an EIDL. If a business owner did not want to pay back the loan, they could take out an EIDL advance, which was a cash advance of up to $10,000 that did not require repayment.

The EIDL is included in income and therefore is not taxable, however, if you paid business expenses using EIDL advance those might be deductible.

Employee Retention Credit (ERC):

The Employment Retention Credit (ERC) is a payroll tax credit for business owners to help keep employees on the job. It is not a loan or a grant. This tax credit is claimed on the tax return of business owners (Form 941), therefore it will not be recorded on their income taxes. The following are the downsides of this credit: it can limit the amount you can deduct on your federal income tax return. Qualified wages are likewise not allowed to be counted as income under the ERC.

Payroll Tax Postponement (PTP):

Another program that allowed firms to defer some payments of railroad retirement taxes and Social Security is the Payroll Tax Postponement (PTP). Like the ERC, these delayed payroll taxes were claimed on the employment tax return rather than the income tax form.

What to Do Next?

The U.S. government is constantly changing these programs, and it is your obligation to keep up with all of the changes. It’s difficult to grow your business while still staying on top of all the tax benefits and credits as a small business owner. Make an appointment with a tax specialist who can help you figure out your taxes and the best CARES Act program for you.

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