Safe Money - 3-1-25

Episode Transcript

Speaker 1 (00:00):
Good morning. Do all. Craig Shillig here and this is
Safe Money. I'm here every Saturday to talk with our
listeners about financial strategies we use to manage and protect
assets safely. I've been an insurance agent for over twenty
four years. During that time, I've learned a few insurance strategies,
like using annuities as safe money harbors, or using cash

(00:22):
value life insurance to supplement your retirement income. Just a reminder,
you can call our office at five six three three
three two two two zero zero if you'd like to
enroll into one of my virtual Medicare community meetings that
I do via zoom. I give two of those every month,

(00:44):
or you can email me at Craig at Craigshillig dot com.
And that's my name, cr Aig at cr Aig scch
I l LG dot com. Today, I want to talk
to you about the wonderful world of taxes because it's

(01:06):
tax season. I'll cover some tax items and then I'll
also talk to you about, more importantly, the ten year
rule for inherited iras. Now, please understand I'm not a
tax advisor and I do not do taxes. If you
need to referral to a good tax professional. Call or
email me and I'll give you some names that can

(01:30):
help you with that. The importance I have of the
ten year rule for inherited irase is I've seen this
happen more and more, and there's a lot of confusion
around it. So I'll talk more about that here a
little bit. Are you missing these five small business tax
deductions tax reform under the Tax Cuts and Jobs Ax

(01:54):
known as TCJA, which was enacted in December twenty seventeen
to nearly every business and individual in twenty eighteen and
then those years ahead. With the reform, business expenses may
have been taxed differently over the past few years. Since
the provisions remain effective through the end of this year,

(02:17):
you're still allowed to write off standard business expenses such
as marketing, business equipment, employee costs, and financial planning software.
Review these five small business tax deductions to help make
the most of the provisions in place. These may impact

(02:41):
how you file Depreciation of assets. Small business owners can
immediately write off more property expenses, and that includes certain
improvements to a building's interior, the roof, their HVAC system,
fire protection systems, and alarm and security stems. What's more,

(03:01):
the deduction sealing increase from a half million to one
million dollars. In the first year, businesses could deduct one
hundred percent of the cost of certain eligible property acquired
in placement service after September of twenty seventeen and before
January of twenty twenty three. The one hundred percent allowance

(03:25):
began phasing out after the twenty twenty two tax year
and expires in January of twenty twenty seven. Let's talk
about the accounting method. Businesses with average annual grocery septs
at twenty five million or less for the last three
years can use the cash method of accounting, so your

(03:46):
taxes can reflect only real profits. Meals and entertainment. Entertainment
expense deductions were mostly eliminated. However, you can still write
off fifty percent of client meals if you stay within
specific IRS criteria. The fifty percent limit applies to employees

(04:08):
or their employers, and do self employed persons including independent
contractors or their clients, depending on whether the expenses are reimbursed.
Let's do some examples of meals that might be included.
Meals while traveling away from home, whether eating a loan
or with others on business or meals at a business

(04:33):
convention or a business league. Meeting and entertainment expenses are
generally non deductible. However, you may continue to deduct fifty
percent of the cost of business meals if you or
an employee is present and the food or beverages are
not considered lavish or extravagant. The meals may be provided

(04:55):
to a current or potential business customer, client, consultant, or
similar business contact. Food and beverages that are provided during
entertainment events are not considered entertainment if purchased separately from
the entertainment, or the cost of the food and the
beverages is stated separately from the cost of the entertainment

(05:18):
on one or more bills, invoices or receipts. However, the
entertainment disallowance rule may not be circumvented through inflating the
amount charged for food and beverages. Other rules for meals
and entertainment expenses. Any allowable expense must be ordinary and necessary.

(05:40):
An ordinary expense this comes right out of the IRS rules,
is one that is common and accepted in your trade
or business. A necessary expense is one that is helpful
and appropriate for your business. An expense doesn't have to
be required to be considered necessary. Expenses not not be

(06:01):
may not be lavish or extravagant. An expense isn't considered
lavish or extravagant if it is reasonable based on the
facts and circumstances. So there's a couple of examples here,
and for each example, you're gonna assume that the food
and bever's expenses are ordinary and necessary unct and they're

(06:23):
not lavish or extravagant under the circumstances. Let's also assume
that taxpayer and the business contact are not engaged in
a trade or business that has any relation to the
entertainment activity. So taxpayer A invites taxpayer or invites B,

(06:44):
who's a business contact, to a baseball game. UH A
purchase of tickets for A and B to attend the game.
While out the game, UH, taxpayer A buys hot dogs
and drinks for A and B. The baseball game is
entertainment as defied under the regulation section one point two
seventy four, and thus the cost of the game tickets

(07:06):
tickets is an entertainment expense and is not deductible by
taxpayer A. The cost of the food, so the hot
dogs and the drinks, which are purchased separately from the
game tickets, is not an entertainment expense and is not
subject to Section two seventy four disallowance. Therefore, taxpayer amay

(07:29):
deduct half of the expenses associated with the hot dogs
and drinks purchased at that baseball game. So taxpayer Charlie
invites David, a business contact, to a basketball game. Charlie
purchases tickets for Charlie and David to attend the game
in a suite where they have access to food and beverages.

(07:51):
The cost of the basketball game tickets, as stated on
the invoice, includes the food and beverages. The basketball game
is entertainment is defined by Regulation one, and thus the
cost of the game tickets is an entertainment expense and
not deductible by Charlie. The cost of the food in
the beverages, which are not purchased separately from the game tickets,

(08:14):
is not stated separately on the invoice. Thus, the cost
of the food and beverages is also an entertainment expense,
and this is subject to Section two seven to four disallowance. Therefore,
Charlie may not deduct any of the expenses associated with
the basketball game. Let's assume for an example, except the

(08:36):
invoice for the basketball game tickets separately states the cost
of the food and beverages. Under this example, the cost
of the game tickets, other than the cost of the
food and the beverages, is an entertainment expense and is
not deductible by Charlie. However, the cost of the food

(08:56):
and beverages, which is stated separately on the invoice for
the game tickets, is not entertainment expenses and is not
subject to Section two seventy four of the disallowance rule. Therefore,
Charlie may deduct fifty percent of the expenses associated with
the food and beverages provided at the game. Let's talk

(09:17):
about entertainment. Entertainment includes any activity generally considered to provide entertainment, amusement,
or recreation. Examples include entertaining guests a nightclubs, social athletic
and sporting clubs, theaters, sporting events, on yachts or on
a hunting, fishing vacation or similar trip. Entertainment may also

(09:41):
include meeting personal, living or family needs of individuals, such
as providing meals a hotel suite or a car to
a customer and or their families. Deductions may depend on
the type of business. Your kind of business may determine
the particular activity is considered entertainment. For example, if you're

(10:04):
a dress designer and you have a fashion show to
introduce your new designs to store buyers, the show generally
isn't considered entertainment. This is because fashion shows are typically
in your business. But if you're an appliance distributor and
you hold a fashion show for spouses of your retailers,
the show is generally considered entertainment. Separating costs. If you

(10:28):
have one expense that includes the cost of entertainment and
other services such as lodging, your transportation, you must allocate
that expense between the cost entertainment and the cost of
other services. You must have a reasonable basis for making
this allocation. For example, you must allocate your expenses if
a hotel includes entertainment in its lounge on the same

(10:50):
bill with your room charge. There are exceptions to this rule.
In general, entertainment expenses are non deductible. However, there are
a few exceptions to the general, including entertainment treated as
compensation on your originally file tax return and treated as
wages to your employees. Recreational expenses for employees, such as

(11:13):
a holiday party or a summer picnic, Expenses related to
attending business meetings or conventions of certain exempt organizations such
as a business league, Chamber of commerce, professional or professional associations, etc.
Entertainment sold to customers. For example, if you run a nightclub,

(11:35):
your expenses for the entertainment you furnish your customers, such
as a floor show, aren't subject to non deductible rules.
So let's talk about non deductible entertainment. Generally, you can't
deduct any expense for an entertainment event. This includes expenses
for entertaining guests at a nightclub, at a social, athletic

(11:57):
or sporting club, at theaters, at sporting events, on yachts
or on a hunting, fishing vacation or similar trips. Let's
see club dues and membership fees. You can't deduct dues,
including initiation fees, for memberships and any club organized for business, pleasure, recreation,

(12:17):
or other social purposes. This rule applies to any membership
organization if one of the principal purposes is either to
conduct entertainment. Activities for members or their guests, or to
provide members or their guests with access to entertainment facilities
discussed later in this chapter. The purposes and activities of

(12:39):
a club, not its name, will determine whether or not
you can deduct the dues You can't deduct the dues
paid to country clubs, golf and athletic clubs, airline clubs,
hotel clubs, and clubs operated to provide meals under circumstances
generally considered to be conducive of business discussions. Gifts or entertainment.

(13:05):
Any item that might be considered either a gift or
entertainment will generally be considered entertainment. However, if you give
a customer packaged food or beverages that you intend the
customer to use at a later date, you can treat
that as a gift. Employee employer credit for paid family
or medical eve business owners can deduct up to twenty

(13:28):
five percent of wages for qualifying employees up to twelve
weeks per taxable year. Because there are specific rules for
calculating their percentage, please consult your tax advisor. This falls
under to the Consolidation Appropriations Act, known as CAA of

(13:49):
twenty twenty two. This tax credit also is extended through
twenty twenty five. Commuting costs, The TCJA Consolidated Appropriations Act
to twenty twenty two cut any tax deductions for commuting

(14:11):
costs for you and your employees, with one exception. If
any of your employees bike to work or you have
a program in place to reimburse them for bicycle commuting expenses,
those costs can deducted as a business expense through twenty
twenty five. So let's talk about business entities. The biggest

(14:34):
change with tax reform is related to how your business
is set up. Self employed financial professionals who are in
less than are equal to one hundred and ninety nine
hundred and fifty and twenty twenty four or three hundred
and eighty three nine hundred for those Finally, joint returns
can potentially qualify for a twenty percent Qualified Business Income

(14:57):
QBI tax deduction. Let's talk about S corps subchapter S.
If your business is structured as an S corp, you
aren't necessarily required to pay additional business taxes on top
of your personal taxes. If you are in the top
income bracket, which has a thirty seven percent tax rate.

(15:19):
Then your personal tax rate will top out at twenty
nine point six after the twenty percent reduction. Partnerships and
Sole proprietor LLCs. If your business is set up as
a partnership or sole proprietorship LLC, which usually has a
pass which acts as a pass through entity that doesn't

(15:42):
require ownership taxes, you may qualify for a twenty percent deduction.
C corps. If your business is a C corp or
any other structure that requires business taxes, you won't qualify
for the twenty percent deduction. However, there may be a
cuts designed for corporations that could help decrease your tax burden.

(16:06):
TCJA Tax Cuts for Jobs AC requires a flat twenty
one percent tax for C corps on top of your
personal taxes. Considering if your business entity is still the
right choice may help you save the most on your taxes.
In addition to these deductions, there are tax Cuts for

(16:27):
Jobs Act, rules on business losses, interest expenses, and alternative
minimum taxes. There's two things you can do today. You
can visit or review your business deductions from last year
with your current tax advisor. You can also review the
structure of your business entity against the newest IRS and

(16:48):
SBA guidelines. Let's now talk about the ten year rule
for inherited iras. And the reason I bring this up
is this is pretty important, especially this has been happening
more and more to some of my clients through death claims.
And let me talk about this a little bit, and
then I want to tell you what to focus on.

(17:10):
The key rule on the ten year rule for iras
is this, if a beneficiary is a non inherited spouse,
so it's a child, So the son of mom and
dad that died and mom leaves the IRA to them.
If Mom took an rm D in the year she died,

(17:32):
that sets the ten year rule if they're over seventy three.
So that's the key point. I want you to know.
I've had a couple of cases where my clients are
late thirties, early forties, parents die this mom and dad
started taking rm ds and they're like, oh, well, I

(17:54):
want to defer this. Well, now they already started taking
an rm D, they have to spend down or take
that asset because IRS and Congress wants their money in
taxes under the ten year rule. So legislation in recent

(18:15):
years has led to changes in retirement planning rules. The
Secure Act passed in twenty nineteen, which started in twenty twenty,
changed some of the rules governing inherited iras, and one
of those changes was the ten year rule for designated beneficiaries.
And this is the key I'm kind of trying to

(18:36):
hammer home to understand what the rule means and how
it affects beneficiaries can help clients with the retirement planning
impacts and how this affects both them and their loved ones.
So this covers who can still implement the stretch strategy,

(18:57):
the original understanding of the ten year rule, and how
IRS regulations have changed. So let's talk about a few
of these. So in eligible designated beneficiary that's an individual
it can still implement the stretch IRA strategy and fall
into one of these five categories. That would be their
surviving spouse, it's a disabled individual, a chronically ill individual,

(19:22):
or any under other individual not more than ten years
younger than the deceased iraowner, or if it's a minor
child of an IRA older excuse me, IRA holder under
the age of twenty one, they can stretch it to
age twenty one and then they have the ten year
rule that applies so designated beneficiaries, and then a ten

(19:46):
year rule. The ten year rule applies to the group
of people now known as designated beneficiaries defined in the
defined as an individual who's not an eligible designated beneficiary.
This group of beneficiaries are mostly impacted by the ten

(20:07):
year rule and they include adult children inheriting an IRA
from the second of both parents to decease. So let
me talk a little bit about the Let's see, so
the rule is this. The old rule used to be
designate beneficiars were required to withdraw all the money from

(20:32):
the inherited IRA by December first, the tenth year following
the IRA holder's death. During the ten year period, beneficiaries
could withdraw any amount of money from the account at
any time without any annual rmds required minimum distributions. However,

(20:52):
any money remaining in the account at the end of
the ten year period would then be considered a miss
rm D and subject to the penalty. So let's talk
about what changed the regulations for inherited irs iras. So
let's see a design any beneficiary is required to withdraw

(21:13):
the money from an inherit IRA now depends on when
the IRA holder passed away relative to when they took
the RMD. So this kid's very long winded, but I'm
going to explain this one more time. If the IRA
holder dies in the year after turning seventy three, the

(21:37):
ten year rules apply as long it was as it
was originally stated, there are not any rm ds, and
the design any beneficiary must withdraw all the money from
the inherited IRA by December thirty first of the ten
year tenth year following the IRA holder's death. If the

(21:59):
IRA hold dies on or after when they started taking
rm ds, the rmds are calculated just as they were
prior to the Secure Act taking a single life table.
But the rule here is they have to take the money.

(22:19):
They have a ten year rule to take that. So
I mean, I have a client that this actually happened
to them. So Mom was seventy three and died when
she was seventy three. She took her RMD that year,
So logically one would think that, well, they have ten

(22:40):
years to exhaust this. No, because she took an rm D,
my client only has nine years, so they got to
take it within nine years December thirty first, nine years
in the future, so they have to take another nine
rmds or nine years of payments and or exhaust that
account so that the Irs and Congress can get their taxes.

(23:05):
And there's a lot of confusion out there. So that's
why I bring that up because it's a very important point.
You may want to talk to your children about that,
just so they know in case they're not working with
an advisor who understands r mds as much as I do,
because that's an important point. If you go beyond that

(23:25):
December thirty first of that tenth year, by taking that
RMD late, they're going to tax that at fifty percent.
That's a that's a hefty chunk. And the reason they
want them to take it out in ten years is
so you can't defer it longer in the future like
you could in the past. So please take that to heart,

(23:45):
keep that in mind. If you don't understand that, call me.
I'd be happy to go over it again. But that's
a key point for beneficiaries to know, or at least
the parents to tell the children. Look, these are the rules.
Just be aware of this. It may be something to

(24:07):
bring up when you turn seventy three to talk to
your kids about. Don't forget. I give monthly virtual meetings
regarding Medicare for two different companies every month, and one
meeting I'll cover the Medicare Supplement plan with a standalone
drug plan. That meeting sponsored by well Mark. United Healthcare
is a sponsor for my other virtual meeting, and on

(24:27):
that I focus on Medicare Parts C and Medicare Advantage plans.
You can call my office at five six three three
three two two two zero zero for the zoom meeting
codes and additional dates and times, or you're welcome to
email me at my name Craig at Craigshillig dot com
and that's cr Aig at cr AI g scch I

(24:55):
l l ig dot com and I can send you
the virtual zoom link meeting codes. This is Craig Sheilligg
with Safe Money