In Cray Kaiser’s Employee Spotlight series, we highlight a member of the CK team. We couldn’t be prouder of the team we’ve grown and we’re excited for you to get to know them. This month we’re shining our spotlight on David Dang.

GETTING TO KNOW DAVID

David plays a crucial role in the assurance department at Cray Kaiser. As an in-charge assurance accountant, he is deeply involved in the audit process, whether it’s for-profit, non-profit, or employee benefit plan (EBP) audits. David’s day-to-day responsibilities include performing audit tests and conducting analytical procedures to ensure that financial statements are accurate and comply with relevant regulations.

Before joining Cray Kaiser, David earned a Bachelor of Accountancy and Finance from DePaul University. He then spent two years working at Baker Tilly, where he gained valuable experience that has shaped his approach to accounting. David’s background has equipped him with a strong foundation in both theory and practice, which he now applies to his work at CK.

WHY CK?

David was drawn to Cray Kaiser by the firm’s commitment to “lifelong learning.” This motto resonates with David, who is passionate about continually expanding his knowledge in both assurance and tax. The opportunity to grow and learn in a supportive environment was a major factor in his decision to join the CK team in July of 2024. Since coming on board, David has embraced the firm’s culture of education and is eager to develop his skills further.

For David, the core values of “education” and “people” hold special significance. He values the chance to learn from new experiences and the mentorship provided by his colleagues. The supportive environment at CK, where everyone embodies these values, has been instrumental in David’s professional development. He aspires to follow in the footsteps of his mentors and contribute to the growth of others in the firm.

David’s advice for those just starting out in the accounting industry is simple but profound: be open to new experiences and ask a lot of questions. He believes that there is no such thing as a dumb question, especially when you are new to the field. For David, the key to success is a willingness to learn and the courage to seek out knowledge whenever possible.

MORE ABOUT DAVID

How do you like to spend your weekends/time off?

I like to cook and try new recipes; I am currently on the hunt for the best chocolate chip cookie recipe!

What motto do you live by?

Failure builds confidence. You learn so much from your mistakes so you should be open to trying new things and know you won’t be perfect.

Do you have a special/hidden talent or hobby?

I can solve a Rubik’s cube in less than 30 seconds. I hope to improve my time and learn how to solve it blindfolded!

What’s your favorite movie or TV show?

Oceans 11 is my favorite heist movie, and it has a star-studded cast! Community is my favorite TV show (6 seasons and a movie)!

What’s the last book you read?

Atomic Habits and Dessert Person. My favorite self-improvement book and my current baking obsession.

At Cray Kaiser, trust is more than a core value—it’s the foundation of every client relationship. We believe trust is earned through consistent dedication, transparency, and a deep understanding of our clients’ needs. This commitment to building trust is reflected in our work, and as our 2024 NPS score reveals, it continues to resonate with those we serve. Our clients’ trust in us is an honor and a driving force behind the high levels of satisfaction and loyalty we’re proud to see year after year.

NPS Demystified
For anyone unfamiliar with it, Net Promoter Score, or NPS, is a standardized metric used across industries to gauge customer loyalty and satisfaction. How does it work? Customers are asked one straightforward question: “On a scale from 1 to 10, how likely are you to recommend our business to a friend or colleague?”

From the responses, customers fall into one of three groups:

• Promoters (scores 9-10): Your raving fans!
• Passives (scores 7-8): Happy, but not necessarily vocal about it.
• Detractors (scores 0-6): Those with concerns about your offerings
  

The formula to derive the NPS is as straightforward as the question itself—subtract the percentage of detractors from the percentage of promoters.

To give some context: A score above zero is already good, surpassing 50 is deemed excellent, and anything beyond 80 is simply incredible.

Cray Kaiser: Continuing to Set New Industry Standards in 2024

Just as your numbers tell the story of your business, ours tell the story of our commitment to excellence. This year, we’re proud to have achieved an NPS score of 91, far surpassing the accounting industry’s average of 41. But our success doesn’t stop there—our score also outpaces market leaders like Costco, Amazon, and Netflix.

For us, it’s more than just a number—it’s a powerful affirmation that our clients trust and genuinely value the service we provide.

Your Trusted Advisors

At Cray Kaiser, our success hinges on your success. In 2024 and beyond, our commitment remains steadfast: prioritizing your needs, delivering impeccable accuracy in our numbers, and providing unmatched people skills. We’re here to support your growth, navigate challenges, and celebrate every milestone with you. We look forward to another year of achieving success together!

In Cray Kaiser’s Employee Spotlight series, we highlight a member of the CK team. We couldn’t be prouder of the team we’ve grown and we’re excited for you to get to know them. This month we’re shining our spotlight on Jack Thompson.

GETTING TO KNOW JACK

Jack joined the Cray Kaiser team in July 2024 and has quickly become an integral part of our assurance department. As an in-charge accountant, Jack is responsible for performing compilation and review engagements and lending his expertise to audit projects. With a background in tax, Jack is a versatile team member, assisting the tax department during his downtime. His multifaceted role allows him to stay engaged with a variety of accounting functions, making him a valuable asset to the firm.

Jack’s journey in the accounting field has given him valuable insights that he is eager to share with those just starting out. His advice? Stay in public accounting. Jack has spent time in both public and industry accounting, and while he values the experience gained in each sector, public accounting provided the most valuable experience for his career. Jack believes that the challenges and learning opportunities in public accounting are unparalleled and provide a solid foundation for a successful career.

WHY CK?

When asked what drew him to Cray Kaiser, Jack highlighted the firm’s client base, which is largely comprised of family-owned businesses. This aspect of CK’s work resonates deeply with Jack, as it aligns with his values and provides an opportunity to build meaningful relationships with clients. The family-oriented environment at CK offers Jack a unique professional experience that fuels his enthusiasm for his work.

Although Jack is relatively new to CK, he is already motivated by the firm’s culture and values. He believes that working in public accounting is incredibly valuable for his personal growth as an accountant, and he is eager to develop his skills further at CK. Among the firm’s core values, the one that stands out most to Jack is “care.” This value aligns perfectly with Jack’s own commitment to delivering the highest quality care to CK’s clients. He appreciates that CK’s management truly cares for their clients and is dedicated to producing the best possible results.

As Jack looks ahead, he is focused on growing and developing his auditing abilities. While he has gained some experience in this area, he is determined to build the confidence and skillset necessary to operate independently in all assurance functions. Auditing is a key area where Jack sees room for growth, and he is committed to mastering it as part of his professional development.

MORE ABOUT JACK

If you could be an expert at anything, what would it be and why?

I would like to become an expert working in the review line of assurance work. I have some background in this area, but I am far from becoming an expert on this product. I would like to be able to operate completely independently while having the support and confidence of the management team.

How do you like to spend your weekends/time off? Bonus question: what do you want to do most when tax season is over?

In my downtime, I like to go fishing and play chess, but I most like to spend the summer weekends at my family’s lake house in Laporte.

Tell us about your family.

I live in Lombard, Illinois, with my wife, Allyson, and my dog, Lennon. We’ll be married for three years this coming October 2024. Newlywed life has been great for us over the past three years, and we are looking to grow our family.

Do you have a special/hidden talent or hobby?

My hidden talent is that I love to sing! I like to sing while working at times so I’m sure that I will be notorious for humming or singing amongst my cubemates.

Late last month, the IRS provided an update on the processing of Employee Retention Credit (ERC) claims. In the update, the agency plans to deny tens of thousands of “high-risk” ERC claims while starting a new round of processing “low-risk” claims. 

IRS Commissioner Danny Werfel said in the release: “The completion of this review provided the IRS with new insight into risky Employee Retention Credit activity and confirmed widespread concerns about a large number of improper claims. We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims.”

The IRS has identified between 10% and 20% of claims fall into what the agency has determined to be the highest-risk category, showing clear signs of being erroneous claims for the pandemic-era credit. This high-risk group includes filings with warning signals that clearly fall outside the guidelines established by Congress.

Additionally, the IRS also estimates between 60% and 70% of the claims show an unacceptable level of risk. For this category of claims with risk indicators, the IRS will be conducting additional analysis to gather more information with a goal of improving the agency’s compliance review, speeding resolution of valid claims while preventing improper payments.

For taxpayers who made a questionable claim, there is a claim withdrawal process available.  Many of these taxpayers may have been misled by promoters who incorrectly indicated the business qualified for the ERC. Evidence of the widespread fraud related to ERC is reflected in the IRS announcing over $2 billion in compliance efforts.

On a positive note, the IRS is concerned about small businesses waiting on legitimate claims, and the agency is taking more action to help. Between 10% and 20% of the ERC claims show a low risk. For those with no eligibility warning signs that were received prior to last fall’s moratorium, the IRS will begin judiciously processing more of these claims.

For clients awaiting approval of their ERC claims, the IRS indicates that no further action should be taken. Frustratingly, they ask taxpayers to await further notification from the IRS. Cray Kaiser will keep you apprised of further ERC developments.

In this video, Kayla Daniels, an assurance supervisor at CK, explains the importance of Employee Benefit Plan Audits, emphasizing their role in ensuring compliance with Department of Labor regulations and internal revenue codes. She discusses the audit process from risk assessment to financial statement preparation. Kayla also offers recommendations for improving plan management and oversight to enhance compliance and operational efficiency.

Transcript:

My name is Kayla Daniels. Employee Benefit Plan Audit is an audit that is required by the Department of Labor to be filed with your 5500 annual filing. So Employee Benefit Plan Audit is a compliance audit, so we are making sure that plan processes and plan transactions are in agreement with the plan provisions in the plan documents.

Generally employee benefit plan audits are required for any plan that has a hundred people with balances in the plan. The purpose of an employee benefit plan audit is very compliance based. It is to make sure that your plan is operating in compliance with Department of Labor regulations, internal revenue codes, and a lot of the time those regulations and codes will be built into the plan document. So our audit is actually going to focus on making sure that your plan activities and transactions are in line with those plan provisions.

The value that can be added from an Employee Benefit plan audit is related to identifying places in your plan that might have a weakness or could be improved in some way. So our audit will definitely look at those areas that might be a little bit more complex or areas that have a lot of room for error. So during our audit we’ll bring it to the attention of management, any areas that we see that could be improved and that will help your plan operate more efficiently, more effectively, and will make sure that you’re in compliance.

One of the key risks associated with employee benefit plans is the remittance of employee funds. So there is a requirement that plan sponsors have to permit funds in a timely manner. So that’s as soon as feasibly possible or as soon as the assets can be segregated, those assets need to go from the employer to the plan. And we’ll see many times that there are delayed remittances. So it took a lot of time between when it was withheld in payroll and when the plan actually received it. And that’s something that the DOL will definitely look at if you’re ever subjected to an audit. And when you do have delayed remittances it is your responsibility to correct that by calculating lost earnings and remitting those lost earnings to the participant to make them whole because a lot of our audit is going to focus on making sure that employee funds are being used in a proper manner in accordance with the DOL regulations.

Another deficiency that we sometimes see in plans is improper definition of compensation, which the definition of compensation is used when you’re calculating employee or employer contributions. And in the plan provisions, this can be kind of complex where certain types of compensation are excluded for certain types of contributions. So these things can be easily missed and fall through the cracks or maybe the payroll system isn’t set up correctly and is calculating contributions on the wrong compensation. So that’s also something that we look at during our audit and something that we see quite commonly and it’s something that we can fix and make sure that it’s right in the future.

And then another common deficiency that we see is deferral elections for employees not being followed. So when they sign up for the plan, they’ll tell you I want 5 % of my pay being withheld to the plan. And as a plan sponsor, you are required to do what a person wants you to do. And then after that point, they can change your deferral. So it’s important that there’s a process in place to track those changes, to track those new enrollments, to make sure that the employee’s authorization is being followed with their payroll funds.

So the first place you want to start when you’re going to perform an employee benefit plan is with our planning and risk assessment. So we will set up a meeting with the client, we will discuss any changes that happened during the year that would include plan amendments, any new plan documents, agreements, and then that’ll serve as the foundation for our risk assessment. And during that process, we’re going to make sure that we identify all the risky areas of the plan and we’ll look back at prior years too to make sure that we’re including anything specific to the plan, where we will modify our audit procedures to ensure that we’re covering all of those areas and that our audit has great audit results. And from that step, we’re going to perform detailed testing of all the significant areas of the plan. And those generally will be related to contributions, distributions, loans and expenses. So we’ll do individual testing of all those areas to make sure that everything is in compliance with the plan documents. And lastly we’re going to prepare our financial statements which will be attached to the 5500.

Some of the discrepancies that you’ll see in the financial statements of plans will be supplemental schedules so that is required by the DOL. If there’s any delay remittances, those need to be identified and recorded in the 5500, in the financial statements. Also, you may see inconsistencies between the financial statement and the 5500. And either the 5500 will have to be revised so that it matches the audited amounts or will have to include a financial statement disclosure to make sure that those match up with each other for the filing.

The number one recommendation I would have for any plan that wants to improve their financial reporting in relation to their employee benefit plan would be to have a member of management or a team of management for proper oversight. That would be a person who does not perform the everyday activities of the plan but a person who knows the plan very well and can be involved in all the processes to make sure that everything is in compliance with the plan. When you are overseeing the process of your plan, you’re going to want to make sure that you have proper personnel documentation in place so that would be signed I -9 forms, anything from the personnel file that will support the important demographic information. So you’ll want to have those available to your auditors because we’re going to want to look at those to make sure that everything’s right. Also if you use paper forms for loans, distributions or deferrals you’re going to want to gather those. Make sure that they’re organized in a place where you can access them.

You need to have an employee benefit plan performed every year that you have over 100 participants with balances and also you can have an audit done if you believe that your plan is going to go over 100 participants in the near future.

One of the more complicated issues that can come up when administering an employee benefit plan is when you realize that you haven’t followed employee deferral instructions. So you’ll find out a person originally deferred 5% and then they increased it to 15% and you didn’t implement that in a timely manner. So how you would fix that is you would remit them the extra that they missed out on and then you would calculate any missed earnings. If the market head gains and they missed out on those, you would calculate them and send them over to the participant to essentially make them whole again.

And another issue that you might come across in plans is issues with vesting. If there is employer contributions where it takes years of service for the participant to become fully vested. Sometimes when a participant takes a distribution, the vesting can be calculated incorrectly, which means that the person might not receive their full distribution. And in that circumstance, you would have to make an additional distribution to that participant to make them whole again.

So annually, the plan is required to have discrimination testing, and that is a series of testing that will ensure that highly compensated employees are not being favored over non-highly compensated employees and this is testing that will be performed either by the plan personnel or a third-party administrator. And the results of those plans will let you know if you need to make any refunds back to highly compensated employees and you need to remit those excess contributions within two and a half months after year-end or else you will have to pay a penalty. So it’s important to get those done in a timely manner and to make sure that you’re keeping track of your compliance testing every year.

One thing that I’ve learned while doing employee benefit plans is just the attention to detail that’s needed that you can carry over into other areas of your work life, where you really need to pay attention to what’s the intention, what is written into this agreement, and pay attention to those small details that really make a big difference.

A situation where taxpayers often make tax mistakes, is when deciding if it is better to receive a home as a gift or as an inheritance. It is generally more advantageous tax-wise to inherit a home rather than to receive it as a gift before the owner’s death. This article will explore the various tax aspects related to gifting a home, including gift tax implications, basic considerations for the recipient, and potential capital gains tax implications. Here are the key points that highlight why inheriting a home is often the better option.

RECEIVED AS A GIFT

First, let’s explore the tax ramifications of receiving a home as a gift. Gifting a home to another person is a generous act that can have significant implications for both the giver (the donor) and the recipient (the donee), especially when it comes to taxes. Most gifts of this nature are between parents and children. Understanding the tax consequences of such a gift is crucial for anyone considering this option.  

Gift Tax Implications – When a homeowner decides to gift their home to another person (whether or not related), the first tax consideration is the federal gift tax. The Internal Revenue Service (IRS) requires individuals to file a gift tax return if they give a gift exceeding the annual exclusion amount, which is $18,000 per recipient for 2024. This amount is inflation-adjusted annually. When gifts exceed the annual exclusion amount, and a home is very likely to exceed this amount, it will necessitate the filing of a Form 709 gift tax return.

It’s worth mentioning that while a gift tax return may be required, actual gift tax may not be due thanks to the lifetime gift and estate tax exemption. For 2024, this exemption is $13.61 million per individual, meaning a person can gift up to this amount over their lifetime without incurring gift tax. The value of the home will count against this lifetime exemption.

Note: The lifetime exclusion was increased by the Tax Cuts and Jobs Act (TCJA) of 2017, which without Congressional intervention will expire after 2025, and the exclusion will be cut by about half.  

Basis Considerations for the Recipient – For tax purposes basis is the amount you subtract from the sales price (net of sales expenses) to determine the taxable profit. The tax basis of the gifted property is a critical concept for the recipient to understand. The basis of the property in the hands of the recipient is the same as it was in the hands of the donor. This is known as “carryover” or “transferred” basis.

For example, if a parent purchases a home for $200,000 and later gifts it to their child when its fair market value (FMV) is $500,000, the child’s basis in the home would still be $200,000, not the FMV at the time of the gift. If during the parent’s time of ownership, the parent had made improvements to the home of $50,000, the parent’s “adjusted basis” at the time of the gift would be $250,000, and that would become the starting basis for the child.

If a property’s fair market value (FMV) at the date of the gift is lower than the donor’s adjusted basis, then the property’s basis for determining a loss is its FMV on that date.  

This carryover basis can have significant implications if the recipient decides to sell the home. The capital gains tax will be calculated based on the difference between the sale price and the recipient’s basis. If the home has appreciated significantly since it was originally purchased by the donor, the recipient could face a substantial capital gains tax bill upon sale.

Home Sale Exclusion – Homeowners who sell their homes may qualify for a $250,000 ($500,000 for married couples if both qualify) home gain exclusion if they owned and used the residence for two of the prior five years counting back from the sale date. However, when a home is gifted that gain qualification does not automatically pass on to the gift recipient. To qualify for the exclusion the recipient would have to first meet the two of the prior five years qualifications. Thus, where the donor qualifies for home gain exclusion it may be best taxwise for the donor to sell the home, taking the gain exclusion and gift the cash proceeds net of any tax liability to the donee. 

Capital Gains Tax Implications – The capital gains tax implications for the recipient of a gifted home are directly tied to the basis of the property and the holding period of the donor. If the recipient sells the home, they will owe capital gains tax on the difference between the sale price and their basis in the home. Given the carryover basis rule, this could result in a significant tax liability if the property has appreciated since the donor originally purchased it. Capital gains are taxed at a more favorable rate if the property has been held for over a year. For gifts, the holding period is the sum of the time held by the donor and the donee, sometimes referred to as a tack-on holding period.

Special Considerations – In some cases, a homeowner may transfer the title of their home but retain the right to live in it for their lifetime, establishing a de facto life estate. In such situations, the home’s value is included in the decedent’s estate upon their death, and the beneficiary’s basis would be the FMV at the date of the decedent’s death, potentially offering a step-up in basis and significantly reducing capital gains tax implications, i.e., treated as if they inherited the property.

AS AN INHERITANCE

There are significant differences between receiving a property as a gift or by inheritance. 

Basis Adjustment – When you inherit a home, your basis in the property is generally “stepped up” to the fair market value (FMV) of the property at the date of the decedent’s death. However, occasionally this could result in a “step-down” in basis where a property has declined in value. Nevertheless, in this day and age, most real estate would have appreciated in value over the time the decedent owned it, and the increase in value will not be subject to capital gains tax if the property is sold shortly after inheriting it.

For example, if a home was purchased for $100,000 and is worth $300,000 at the time of the owner’s death, the inheritor’s basis would be $300,000. If the inheritor sells the home for $300,000, there would be no capital gains tax on the sale.

In addition, the holding period for inherited property is always considered long term, meaning inherited property gain will always be taxed at the more favorable long-term capital gains rates.

Note: The Biden administration’s 2025–2026 budget proposal would curtail the basis step-up for higher income taxpayers. 

In contrast, if a property is received as a gift before the owner’s death, the recipient’s basis in the property is the same as the giver’s basis. This means there is no step-up in basis, and the recipient could face significant capital gains tax if the property has appreciated in value, and they decide to sell it.

Using the same facts as in the example just above, if the home was gifted and had a basis of $100,000, and the recipient later sells the home for $300,000, they would potentially face capital gains tax on the $200,000 increase in value.

Depreciation Reset – For an inherited property that has been used for business or rental purposes, the accumulated depreciation is reset, allowing the new owner to start depreciation afresh on the inherited portion and since the inherited basis is FMV at the date of the decedent’s death, the prior depreciation is disregarded. This is not the case with gifted property, where the recipient takes over the giver’s depreciation schedule.

Given these points, while each situation is unique and other factors might influence the decision, from a tax perspective, inheriting a property is often more beneficial than receiving it as a gift. However, it’s important to consider the overall estate planning strategy and potential non-tax implications.

Please contact the tax experts Cray Kaiser at (630) 953-4900 for developing a strategy that is suitable for your specific circumstances. 

In the labyrinth of financial planning and tax-saving strategies, Health Savings Accounts (HSAs) emerge as a multifaceted tool that remains underutilized and often misunderstood. An HSA is not just a way to save for medical expenses; it’s also a powerful vehicle for retirement savings, offering unique tax advantages. This article delves into who qualifies for an HSA, the tax benefits it offers, and how it can serve as a supplemental retirement plan.

Qualifying for a Health Savings Account – At the heart of HSA eligibility is enrollment in a high-deductible health plan (HDHP). As of the latest guidelines, for the tax year 2024, an HDHP is defined as a plan with a minimum deductible of $1,600 for an individual or $3,200 for family coverage. The plan must also have a maximum limit on the out-of-pocket medical expenses that you must pay for covered expenses, which for 2024 is $8,050 for self-only coverage and $16,100 for family coverage. But having an HDHP is just the starting point. To qualify for an HSA, individuals must meet the following criteria:

• Coverage Under an HDHP: You must be covered under an HDHP on the first day of the month.
• No Other Health Coverage: You cannot be covered by any other health plan that is not an HDHP, with certain exceptions for specific types of insurance like dental, vision, and long-term care.
• No Medicare Benefits: You cannot be enrolled in Medicare. This rule applies to periods of retroactive Medicare coverage. So, if you delay applying for Medicare and later your enrollment is backdated, any contributions to your HSA made during the period of retroactive coverage are considered excess, are not tax deductible and are subject to penalty, if not withdrawn from the account.
• Not a Dependent: You cannot be claimed as a dependent on someone else’s tax return.
• Spouse’s Plan: Joint HSAs aren’t allowed; each spouse who is eligible and wants an HSA must open a separate HSA.

These criteria ensure that HSAs are accessible to those who are most likely to face high out-of-pocket medical expenses due to the nature of their health insurance plan, providing a tax-advantaged way to save for these costs.

It should also be noted that unlike IRAs, 401(k)s and other retirement plans, it is not necessary to have earned income to be eligible for an HSA.

Tax Benefits of Health Savings Accounts – HSAs offer an unparalleled triple tax advantage that sets them apart from other savings and investment accounts:

• Tax-Deductible Contributions: Contributions to an HSA are tax-deductible, reducing your taxable income for the year. This deduction applies whether you itemize deductions or take the standard deduction. Rather than being a tax deduction, HSA contributions made by your employer are just not included in your income.
• Tax-Free Growth: The funds in an HSA grow tax-free, meaning you don’t pay taxes on interest, dividends, or capital gains within the account.
• Tax-Free Withdrawals for Qualified Medical Expenses: Withdrawals from an HSA for qualified medical expenses are tax-free. This includes a wide range of costs, from doctor’s visits and prescriptions to dental and vision care, and even some over-the-counter medicine, whether or not prescribed.

The combination of these benefits makes HSAs a powerful tool for managing healthcare costs now and in the future.

HSAs as a Supplemental Retirement Plan – While HSAs are designed with healthcare savings in mind, their structure makes them an excellent supplement to traditional retirement accounts like IRAs and 401(k)s. Here’s how:

• No Required Minimum Distributions (RMDs): Unlike traditional retirement accounts, HSAs do not require you to start taking distributions at a certain age. This allows your account to continue growing tax-free indefinitely.
• Flexibility for Non-Medical Expenses After Age 65: Once you reach age 65, you can make withdrawals for non-medical expenses without facing the 20% penalty that would apply to nonqualified distributions at a younger age, though these withdrawals will be taxed as income. This feature provides flexibility in how you use your HSA funds in retirement.
• Continued Tax-Free Withdrawals for Medical Expenses: Regardless of age, withdrawals for qualified medical expenses remain tax-free. Considering healthcare costs often increase with age, having an HSA in retirement can provide significant financial relief.

To maximize the benefits of an HSA as a retirement tool, consider paying current medical expenses out-of-pocket if possible, allowing your HSA funds to grow over time. This strategy leverages the tax-free growth of the account, potentially resulting in a substantial nest egg for healthcare costs in retirement or additional income for other expenses.

Establishing and Contributing to an HSA – Opening an HSA is straightforward. Many financial institutions offer HSA accounts, and the process is like opening a checking or savings account. An individual can acquire a Health Savings Account (HSA) through various sources, including:

• Employers: Many employers offer HSAs as part of their benefits package, especially if they provide high-deductible health plans (HDHPs) to their employees. Enrolling through an employer might also come with the benefit of direct contributions from the employer to the HSA.
• Banks and Financial Institutions: Many banks, credit unions, and other financial institutions offer HSA accounts. Individuals can open an HSA directly with these institutions, like opening a checking or savings account.
• Insurance Companies: Some insurance companies that offer HDHPs also offer HSAs or have partnered with financial institutions to offer HSAs to their policyholders.
• HSA Administrators: Some companies  specialize in administering HSAs. These administrators often provide additional services, such as investment options for HSA funds, online account management, and educational resources about using HSAs effectively.

When choosing where to open an HSA, it’s important to consider factors such as fees, investment options, ease of access to funds (e.g., through debit cards or checks), and customer service.

Once established, you can make contributions up to the annual limit, which for 2024 is $4,150 for individual coverage and $8,300 for family coverage. Individuals aged 55 and older can make an additional catch-up contribution of $1,000.

What Happens If I Later Become Ineligible – If you have an HSA and then later become ineligible to contribute to it—perhaps because you’ve enrolled in Medicare, are no longer covered by a high-deductible health plan (HDHP), or for another reason—several key points come into play regarding the status and use of your HSA:

• Contributions Stop: Once you are no longer eligible, you cannot make new contributions to the HSA. For example, enrollment in Medicare makes you ineligible to contribute further to an HSA. However, the specific timing of when you must stop contributing can vary based on the reason for ineligibility. If you enroll in Medicare, contributions should stop the month you are enrolled.
• Funds Remain Available: The funds that are already in your HSA remain available for use. You can continue to use these funds tax-free for qualified medical expenses at any time. This includes expenses like copays, deductibles, and other medical expenses not covered by insurance, but not insurance premiums.
• After Death: Upon the death of the HSA owner, the account can be transferred to a surviving spouse tax-free and used as their own HSA. If the beneficiary is not the spouse, but is the beneficiary’s estate, the account value is included in the deceased’s final income tax return, subject to taxes. If any other person is the beneficiary, the fair market value of the HSA becomes taxable to the beneficiary in the year of the HSA owner’s death.

Therefore, while you can no longer contribute to an HSA after losing eligibility, the account remains a valuable tool for managing healthcare expenses.

Health Savings Accounts stand out as a versatile financial tool that can significantly impact your tax planning and retirement preparedness. By understanding who qualifies for an HSA, leveraging its tax benefits, and recognizing its potential as a supplemental retirement plan, individuals can make informed decisions that enhance their financial well-being.

Whether you’re navigating high-deductible health plans or seeking additional avenues for tax-efficient savings, an HSA may be the key to unlocking substantial long-term benefits.

Call us at Cray Kaiser at (630) 953-4900 to discuss your situation and how an HSA might be beneficial for you.  

Implementing new accounting standards can often be a daunting task for businesses, requiring significant adjustments to their financial reporting processes. One such change came in February 2016, when the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”. This update, effective for annual reporting periods beginning after December 15, 2021, marked a significant shift in how companies must account for leases. As businesses navigate these new requirements, understanding the nuances of ASU 2016-02 became crucial in ensuring compliance and accurate financial reporting.

In this ASU, lessees are required to recognize a right-of-use asset and associated lease liability on their balance sheet for most operating leases, with exemptions provided to those operating leases with an initial lease term of twelve months or less.

The reasoning behind this ASU is that when entities enter operating leases, they have a “right-of-use” asset and liability with this agreement that prior to this ASU, would have only needed to be disclosed in the footnotes to the financial statements in the form of future payments.

What this pronouncement requires is that the operating right of use assets and lease liabilities are recorded on the date of lease commencement based on the present value of the lease payments over the lease term. Further, over the course of agreement, both the asset and the liability are amortized, which is calculated based on the discount rate. The pronouncement allows for using the risk-free or incremental borrowing rate, depending on the entity’s policy election, that most closely aligns with the terms of the lease agreement at inception.

Think of it as the entity purchasing a tangible asset and financing by obtaining a loan, even though no such loan exists. Therefore, cash paid on the lease will no longer be solely categorized as a lease expense in accordance with Generally Accepted Accounting Principles, but rather a combination of the cash paid, periodic lease expense, and the amortization of the right-of-use asset and right-of-use-liability.

If the entity is subject to financial covenants with a financial institution, this pronouncement may affect the financial ratios to stay in compliance. It is important to discuss with the financial institution and to adjust any covenant calculations to remove its impact from these calculations.

The bad news is regarding the increased burden of implementing ASU 842, especially considering that the resulting change, usually is a marginal change to the entity’s bottom line as it mostly impacts the balance sheet. The good news is that we at Cray Kaiser,  understand the ASU and its calculations and can assist with consulting and calculations to navigate this new standard. You can contact us here or call us at (630) 953-4900.   

2024 ushers in significant regulatory relief for Illinois nonprofit organizations, thanks to Public Act 103-0121. This new legislation raises the contribution revenue thresholds that determine the filing requirements for nonprofits in Illinois, potentially reducing the financial obligation for smaller organizations.

New Contribution Revenue Thresholds

The changes to the contribution revenue thresholds for Illinois not-for-profit organizations are as follows:

• Contribution revenues between $300,000 and $500,000: Organizations are now required to submit reviewed financial statements. This is a change from the previous requirements and is designed to ease the administrative load on smaller nonprofits.
• Contribution revenues over $500,000: Organizations are still required to submit audited financial statements. However, it’s important to note that the audit threshold for charitable organizations using the services of a paid professional fundraiser remains unchanged at $25,000.

Effective Date and Applicability

The changes brought by Public Act 103-0121 apply to organizations with an initial due date (without considering any extension) occurring after January 1, 2024. Consequently, this requirement applies to organizations with a fiscal year ending on June 16, 2023, and later.

Cost Savings and Efficiency

One of the advantages of this regulatory update is the potential cost savings for nonprofits. Reviewed financial statements typically cost less than audited financial statements. This reduction in expenses could be a substantial benefit for smaller organizations operating on tight budgets.

However, nonprofits should consider the long-term implications of switching from audits to reviews. If an organization has decreased revenue in the current year but anticipates revenue growth in the future, it might be more cost-effective to continue with audits despite the immediate savings from reviews. This is especially true if grantors or financing arrangements require audited financial statements. Initial or resumed audits require more setup time and effort from both clients and auditors, so maintaining continuity with audits could lead to greater efficiency and reduced future workload.

Proactive Financial Management

As fiscal year-end approaches, organizations should begin to review their year-to-date activity. A proactive review will help in deciding what if any services are needed. Ensuring that books and records are in order will facilitate efficient and effective services from a CPA firm. Monthly bank reconciliations completed through the fiscal year-end date are a good starting point. These reconciliations are a good indicator to CPAs of an organization’s readiness for an audit.

If you are a nonprofit and want to learn more about how Public Act 103-0121 may impact you, please reach out to the CK nonprofit team at (630) 953-4900.

Here we are again, on the precipice of another round of significant tax changes. The last round of significant tax law changes occurred in 2018, with the Tax Cuts and Jobs Act (TCJA). Most of the tax changes made by the TCJA are not permanent and will expire (sunset) after 2025. With little time before December, 2025, we are encouraging all to review your 2024 and 2025 tax planning – NOW!

We’ll highlight some of the significant provisions deserving of everyone’s attention.

Estate Tax Exclusion – TCJA significantly increased the inflation-adjusted estate and gift tax exclusion. Before TCJA, the estate and gift tax exclusion was $5.49 million (meaning, estates with more than that level of assets faced the prospect of federal estate tax). Post TCJA, the 2024 exemption is dramatically higher at $13.61 million.

However, with the sunset of the TCJA, the exemption would revert back to pre-TCJA levels. Many estate planning professionals are advising clients to act now to reduce their taxable estate, usually through gifts to family members. Especially notable is t the IRS has indicated they will not challenge this strategy. According to the IRS, “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.”

With the additional clarification of the lifetime gift exclusion availability for future estates, wealthy donors should strongly consider ensuring that their gifting strategy maximizes future tax benefits.

Corporate Tax Rate/Qualified Business Income (QBI) Deduction – As part of TCJA, Congress changed the tax rate structure for C corporations to a flat rate of 21% instead of the former graduated rates that topped out at 35%. If allowed to sunset with TCJA, businesses organized as C corporations will face significant tax increases. In fact, the after-tax rate of corporate distributions will well exceed 50%.

Needing a way to equalize the rate reduction for all taxpayers with business income, Under the TCJA, Congress came up with a new deduction for businesses that are not organized as C corporations. This resulted in a new and substantial tax benefit for most non-C corporation business owners in the form of a deduction that is generally equal to 20% of their qualified business income (QBI). Notably for personal service industries (lawyers and accountants for example), the QBI was limited.

Given the potential increase in C corporation tax rates and the elimination of the QBI deduction, businesses may need to revisit their tax structure after 2025.

SALT Limits – SALT is the acronym for “state and local taxes”. TCJA limited the annual SALT itemized deduction to $10,000, which primarily impacted residents of states with high state income tax and real property tax rates, such as New York, New Jersey, and California. Several states have developed somewhat complicated work-a-arounds (called the pass-through entity tax, or PTET) to the limits that benefit taxpayers who have partnership interests or are shareholders in S corporations. The future of the PTET is uncertain with an expired TCJA.

Standard Deductions – The standard deduction is the amount of deductions you are allowed on your tax return without itemizing your deductions. The standard deduction is annually adjusted for inflation. In 2018, the TCJA just about doubled the standard deduction which generally benefited lower income taxpayers and retirees. The increased standard deductions also meant fewer taxpayers claimed itemized deductions – roughly 10% of filers now itemize versus 30% before TCJA.

Personal & Dependent Exemptions – Prior to 2018, the tax law allowed a deduction for personal and dependent exemption allowances. One allowance was permitted for each filer and spouse and each dependent claimed on the federal return. Under current law, there is no dependency exemption. It’s possible that in 2026, the tax benefits related to personal exemptions will come back into play.

Child Tax Credit – Prior to 2018 the child tax credit was $1,000 for each child below the age of 17 at the end of the year. With the advent of TCJA the child tax credit was doubled to $2,000 for each child below the age of 17 at the end of the year. This more than made up for the loss of a child’s personal exemption deduction for lower income families.

Home Mortgage Interest Limitations – Prior to the passage of TCJA, taxpayers could deduct as an itemized deduction the interest on $1 Million ($500,000 for married taxpayers filing separate) of acquisition debt and the interest on $100,000 of equity debt secured by their first and second homes. With the passage of TCJA, the $1 Million limitation was reduced to $750,000 for loans made after 2017 and any deduction of equity debt interest was suspended (not allowed). A return to pre-TCJA levels will tend to benefit higher income taxpayers with more expensive homes and higher mortgages.

Tier 2 Miscellaneous Deductions – TCJA suspended the itemized deduction for miscellaneous deductions for tax preparation and planning fees, unreimbursed employee business expenses, and investment expenses. Most notable of these is unreimbursed employee expenses which allowed employees to deduct the cost of such things as union dues, uniforms, profession-related education, tools and other expenses related to their employment and profession not paid for by their employer. Investment expenses included investment management fees charged by brokerage firms. These types of expenses were allowed only to the extent they totaled more than 2% of the taxpayer’s adjusted gross income. These expenses are currently not deductible.

Tax Brackets – TCJA altered the tax brackets and although most taxpayers benefited, higher income taxpayers benefited the most with a 2.6% cut in the top tax rate. A return to the pre-TCJA rates would have the largest negative effect on higher income taxpayers.

The tax changes to occur with the sunset of TCJA will be dramatically impacted by the November 2024 elections.

Depending upon your circumstances, these changes may impact your long-term planning such as your business structure, estate planning, buying a home, retirement planning, and other issues. It’s going to be an interesting year, for sure, and best to get planning now. Please contact Cray Kaiser at (630) 953-4900 with any questions.