Bonus Depreciation Phase-Out
May 24, 2022
Properly qualifying assets for bonus depreciation can have a significant impact on a business’s bottom line. If an asset qualifies as long-term business property under tax rules, bonus depreciation may allow a business owner to deduct the entire cost of that asset in the year of acquisition.
This will be the last year for 100% bonus depreciation as enacted by Tax Cuts and Jobs Act (TCJA). Starting in 2023, bonus depreciation is scheduled to drop to 80% and will continue to drop by 20% each year thereafter until finally there will be no bonus depreciation starting in 2027.
Prior to the enacting of bonus depreciation, the premier tool for businesses to expense asset purchases was Section 179. Section 179 is still scheduled to be fully available and the current amount of Section 179 deduction allowed is $1,080,000 and the phase-out of the deduction starts once you place eligible assets into service of $2,700,000 and no Section 179 deduction is allowed after $3,780,000 of assets placed in service for that year. Unlike bonus depreciation, Section 179 deductions are only allowed to the extent of taxable income.
Although tax incentives like Section 179 and bonus depreciation can be beneficial, these provisions should only be used in situations that make long-term financial sense for your operation. It is important to always consider your tax circumstances and cash-flow requirements when using these tools. Connect with your William Vaughan Company advisor with additional questions.
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Categories: Tax Compliance, Tax Planning
Strategic Financial Moves to Consider During A Market Downturn
May 19, 2022
The natural ebbs and flows of market volatility can make even the best investors a bit nervous at times. However, smart investors also recognize the opportunities presented by a downturn. These include specific financial strategies to be leveraged for a long-term benefit. Here are several financial moves one should consider during a market lull:
Roth IRA Conversions
During normal market conditions, Roth IRA conversions typically initiate a sizable tax event. However, during a market dip, Roth IRA conversions are a prime opportunity to move funds from a traditional taxable IRA to a tax-free Roth IRA all while saving money.
To achieve the benefits of a Roth IRA conversion, investors convert funds from their traditional IRA to a Roth IRA. While the conversion will trigger a taxable event, it’s based on the contributions and earnings. The larger your pre-tax balance, the more you will owe. During market volatility, financial experts recommend making this move as “it is like getting the Roth IRA on sale” and when the market ultimately recovers, that growth is captured, tax-free, inside of the Roth IRA.
If you don’t have a traditional IRA, this can also be achieved through what some call a “backdoor Roth IRA,” an unofficial means for high-income individuals to create a tax-free Roth IRA.
Remember, the earnings limits for Roth individual retirement account contributions are capped at $144,000 modified adjusted gross income for single investors and $214,000 for married couples filing together in 2022.
To achieve the benefits of a “backdoor” Roth IRA conversion, investors make what’s known as non-deductible contribution to a pre-tax IRA before converting the funds to a Roth IRA, kickstarting tax-free growth.
Gift & Estate Planning
A market downturn is also a great opportunity for individuals seeking to minimize estate taxes and gift assets to others. This is because the value of the securities will be lower, resulting in a lower gift tax amount and all subsequent appreciation will be excluded from your estate – a win-win!
Tax-loss harvesting is another key strategy to consider during a down market. It involves selling investments that have lost value and replace them with similar investments to ultimately offset your capital gains with capital losses. In doing so, investors reduce their tax liability while better positioning their portfolio. This can be done up to $3,000 a year. The average investor can leverage this strategy and it doesn’t involve much but an assessment of your investments and their performance. A couple of items to note when considering this option is:
- It applies only to investments held in taxable accounts – so it does not include 401(k)s, 403(b), IRAs or 529s because the growth in these tax-sheltered accounts in not taxed by the IRS
- This is not a beneficial strategy for those in lower tax brackets – the idea is to reduce your tax liability and traditionally, those individuals in the higher tax bracket have a greater liability and therefore, a greater savings.
- The deadline for taking advantage of this approach is the end of the calendar year – December 31.
Finally, the information provided above is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. We recommend connecting with your financial and tax advisors to discuss the best plan of action for your personal situation.
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Categories: Estate Planning, Tax Planning