Comiskey & Company, PC

If you take an early distribution from your traditional IRA, (before you reach age 59½), you may be hit with a penalty. In addition to the income tax you’ll pay for the withdrawal, you’ll typically pay a 10% early withdrawal penalty. Exceptions exist, such as withdrawals to pay higher education costs. Suppose you’re under 59½, getting divorced and dividing a traditional IRA with your former spouse. Does that count as an exception? Generally, no, says the IRS, though there are ways to avoid the penalty. They involve a Qualified Domestic Relations Order or a proper trustee-to-trustee transfer under a divorce or separation court order. Mistakes can be costly. Contact us for help.

If you own a small business with no employees (other than your spouse) and want to set up a retirement plan, consider a solo 401(k) plan. This is also an option for self-employed individuals or business owners who wish to upgrade from a SIMPLE IRA or SEP plan. For 2024, you can make an elective deferral contribution of up to $23,000 of your net self-employment (SE) income ($30,500 if you’ll be 50 or older as of Dec. 31, 2024). On top of the elective amount, an extra contribution of up to 20% of your net SE income is allowed for solo 401(k)s. For 2024, the combined elective and extra contributions can’t exceed $69,000 ($76,500 for 50 or older) or 100% of net SE income. Questions? Contact us.

Not everyone is eligible to make tax-deductible contributions to a traditional IRA account. For example, for 2025, eligibility for single taxpayers who also contribute to a workplace retirement plan (such as a 401(k) plan), will phase out with income between $79,000 and $89,000. For joint filers, the phaseout range for the spouse who contributes to a work-based plan will be $126,000 to $146,000. For the other spouse who doesn’t contribute to a work-based plan, the phaseout will be between $236,000 and $246,000. Roth IRAs have different phaseout numbers for 2025: $150,000 to $165,00 for single filers; $236,000 to $246,000 for joint filers; and $0 to $10,000 for married separate filers.

The Social Security Administration has announced that the wage base for computing Social Security tax will rise to $176,100 in 2025. This is up from $168,600 in 2024. (Believe it or not, it was just $3,000 from 1937–1950!) Wages and self-employment income above this amount aren’t subject to Social Security tax. The Federal Insurance Contributions Act imposes two taxes on employers, employees and self-employed workers. One is Social Security and the other is Medicare. A maximum amount of compensation is subject to the Social Security tax, but there’s no maximum for Medicare tax. For 2024 and 2025, the FICA tax rate for employers is 7.65% (6.2% for Social Security and 1.45% for Medicare).

Business driving may come to mind when you think about tax deductions for vehicle-related expenses. However, businesses aren’t the only taxpayers that can deduct driving expenses. Individuals may also be able to deduct them in certain circumstances. Unfortunately, under current law, you may be unable to deduct as much as you could years ago. For 2018 through 2025, miles may only be deductible in limited circumstances. The 2024, the per-mile rate varies depending on the purpose. For business, it’s 67 cents; for medical driving for eligible itemizing taxpayers, it’s 21 cents; for active-duty military moving, it’s 21 cents; and for charitable itemizers, it’s 14 cents. Questions? Contact us.

A Savings Incentive Match Plan for Employees (SIMPLE) comes in two flavors: the SIMPLE IRA or the SIMPLE 401(k). Business owners often opt for the SIMPLE IRA. Contributions to a SIMPLE are made on a pretax basis. Contribution limits to SIMPLEs are adjusted annually for inflation. In 2025, employees may generally elect to contribute up to $16,500, up from $16,000 in 2024. The catch-up contribution limit that generally applies for employees age 50 or over who participate in most SIMPLE plans will remain $3,500 for 2025. Beginning in 2025, taxpayers age 60 to 63 will be able to make catch-up contributions up to $5,250. For more about 2025 retirement plan contributions: https://bit.ly/3Yuiw6U

As year end approaches, you may be thinking about tax strategies. One way to reduce potential estate taxes and show generosity to loved ones is to give cash gifts before Dec. 31. Taxpayers can transfer large amounts using the annual exclusion. In 2024, the exclusion amount is $18,000. It covers gifts you make to each recipient. That means if you have three children, you can transfer $54,000 to them in 2024, free of federal gift taxes. Married couples can consent to give each recipient up to $36,000 a year. Other rules may apply, and you need to file a gift tax return if you give more than $18,000 or consent to give gifts with your spouse. We can prepare a gift tax return for you.

Let’s say you have a sideline activity that you consider a business. Perhaps you offer photography services or sell handmade items online. Will the IRS agree that your venture is a business, not a hobby? It’s an essential question for tax purposes. If the expenses from an activity exceed the revenues, you have a net loss. You can’t necessarily deduct that loss on your federal income tax return. The IRS often claims that money-losing sidelines are hobbies rather than businesses, and the tax rules for hobbies aren’t favorable. However, we may be able to help you prove your money-losing activity is really a for-profit business that hasn’t paid off yet. That way, you can deduct the losses.

The IRS has issued 2025 retirement plan numbers. In 2025, individuals with IRAs can contribute up to $7,000 (the same as in 2024). The IRA catch-up contribution for those age 50 or over will remain at $1,000. For those with 401(k) plans, the 2025 contribution limit will increase to $23,500, up from $23,000 in 2024. The same is true for 403(b) plans and 457 plans. The catch-up contribution limit for employees 50 or over participating in these plans will be $7,500 for 2025 (same as 2024). So, the total allowable contribution for 2025 for those 50 or over will be $31,000. In 2025, a higher catch-up limit of $11,250 will apply for employees age 60 to 63 participating in these plans.

Skimming, where criminals use devices they install on ATMs and point-of-sale (POS) readers to steal debit and credit card information, can result in significant financial losses for businesses. Thieves typically use plastic overlays or dummy keypads on machines to read card numbers and PINs. They then use the data to create “clone” cards and withdraw money from victims’ accounts. Businesses with ATMs and POS readers on their premises should post warnings to customers and use security cameras and routine inspections to help prevent skimming. If you think a machine has been compromised, disable it and report the crime to the police immediately.