Spring Cleaning Your Finances

by agwebadmin Uncategorized

Greetings from FKYG again! As we step into the second quarter of 2024, we are excited to bring you the latest updates, insights, and tips from the world of finance and accounting. Our April newsletter is packed with valuable information to help you navigate the complexities of tax season, stay informed about recent regulatory changes, and make strategic decisions for your business and personal finances.

In this edition, you’ll find:

  • Recommended strategies to avoid early IRA withdrawal penalties
  • New IRS publications that help you optimize your financial planning and safeguard your privacy
  • Discussion on exploring Artificial Intelligence in Tax Services

Avoid the Penalty Tax on Early IRA Withdrawals

As financial advisors, it is essential to assist clients who may need to access their IRA funds before reaching the age of 59½. While you have the flexibility to withdraw from their IRAs at any time, withdrawals before age 59½ usually incur penalties. Typically, early withdrawals are subject to income tax and a 10% early withdrawal penalty. Suppose you find yourself in this situation, we recommend several exceptions to this rule exist to mitigate this penalty, and understanding these can significantly benefit you and help you preserve your assets.

Substantially Equal Periodic Payments (SEPPs): If you are facing financial hardship in later stages of life, SEPPs can provide significant penalty-free withdrawals. This involves receiving a series of annual payments based on life expectancy. However, there are a few caveats you need to look out for: 

  • Clients must continue SEPPs for at least five years or until they reach age 59½, whichever is longer. Any cessation or incorrect calculation of these payments can trigger the 10% penalty on all prior withdrawals.
  • There are different IRS-approved methods for calculating SEPPs, such as Required Minimum Distribution (RMD) Method (simplest to calculate), Fixed Amortization Method (based a chosen interest rate), and Fixed Annuitization Method (converts the account balance into an annuity). Be thoughtful and select the one works best for you.
Higher Education Expense: Withdrawals used for qualified higher education expenses for the account owner, their spouse, or dependents are penalty-free. This includes tuition, fees, books, and required supplies.

Medical Expenses: Withdrawals exceeding 7.5% of the account owner’s adjusted gross income (AGI) are exempt from the penalty, regardless of whether the owner itemizes deductions.
 
Military Reservists: Reservists called to active duty for at least 180 days can withdraw penalty-free.
 
Disability: Withdrawals are penalty-free you are permanently disabled and can’t engage in any substantial gainful activity.
 
First-time Home Purchases: Up to $10,000 can be withdrawn penalty-free for the purchase of a first home for you or qualifying relatives.
 
Health Insurance During Unemployment: Withdrawals to pay for health insurance premiums during periods of extended unemployment (after 12 consecutive weeks of receiving unemployment compensation) are exempt from the penalty.
 
Emergency Expenses: Starting in 2024, up to $1,000 annually for urgent personal expenses can be withdrawn without penalty.
 
Disaster Recovery: Up to $22,000 can be withdrawn penalty-free for qualified disaster recovery expenses.
 
Being aware of and utilizing these exceptions can offer clients substantial financial relief and flexibility when accessing their IRA funds early. It is imperative to ensure clients are fully informed about these options and the strict adherence required to avoid unnecessary penalties.
Dirty Dozen Campaign: Phishing and Smishing Scam Warnings

The IRS’s 2024 Dirty Dozen campaign focuses on prevalent scams like phishing and smishing aiming to steal sensitive information via fraudulent emails and texts. Businesses are cautioned against dubious Employee Retention Credit (ERC) claims, as improper filings could lead to severe penalties and criminal charges. Taxpayers should avoid unauthorized third-party assistance for setting up IRS online accounts to prevent identity theft, and be wary of promoters pushing improper fuel tax credit claims, which promise large refunds but leave taxpayers liable for false claims. If you are an existing FKYG client, please inform us in case of any suspicious scamming activities.

Solar and Wind Energy Facilities in Low-Income Communities

The IRS has issued Rev. Proc. 2024-19, offering guidance on solar and wind energy facilities in low-income communities. The procedure clarifies application and documentation requirements for the 2024 program year and details how the capacity limitation will be allocated across different facility categories. Under IRC Sec. 48(e), introduced by the Inflation Reduction Act, an increased energy investment credit is available for solar and wind facilities that secure an environmental justice capacity allocation and are properly placed in service. Definitions and program requirements are outlined in the final regulations (TD 9979). For more information, see News Release IR-2024-86.

Embracing Al: Creating a Future-ready Tax Practice

In the past few decades, Artificial Intelligence (AI) has rapidly evolved, transitioning from a futuristic concept to an integral part of daily discourse. Nowadays, Generative AI, exemplified by Large Language Models (LLMs) like ChatGPT has permeated daily routines, aiding in tasks ranging from crafting humorous poems to summarizing complex subjects for work. AI’s role extends beyond content creation, assisting with tasks like generating complex Excel formulas to summarize client data efficiently

Is it a good idea to use AI for taxes? That’s a bit complicated. While some tax professionals believe they can leverage AI to enhance client service and streamline tasks, freeing up time for strategic activities, others are hesitant to embrace AI, viewing it as a technological shift rather than an investment in future efficiency and effectiveness. On one hand, embracing AI can provide cutting-edge tools to navigate the ever-changing tax landscape effectively. Tax professionals can focus more on providing strategic advice to clients, leveraging AI’s capabilities to augment their expertise; On the other hand, caution is advised when dealing with sensitive information, as AI chat services may lack access to up-to-date data, leading to inaccurate responses. Moreover, since interactions with AI environments may not be private, sensitive client information should be avoided.

Though the outlook of AI for taxes remains uncertain, we consider embracing AI responsibly to be a niche to enhance client service, transform challenges into opportunities, and embrace a future of innovation and growth.

We hope you find this newsletter informative and helpful. As always, our team is here to assist you with any questions or needs you may have. Happy reading, and here’s to a successful and financially sound 2024!

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