Building Wealth Through Home Equity
Oftentimes, the first house a person buys is an affordable condominium, townhouse, or older single-family dwelling also referred to as a “starter home.” It might be small and lack features they dream about such as new appliances in the kitchen or dual sinks in the bath, to a large yard or a garage.
However, the key to a starter home is not to acquire your dream house, it is to build equity that you can eventually deploy to buy your dream home. It’s important not to wait until you have enough money for the ideal property. Start as early as you can and buy something affordable to get your foot in the door of homeownership.
Interest Rates and Maintenance Expenses
Buying a home when mortgage interest rates are low offers a key advantage for building wealth because it reduces your loan payment, thereby freeing up more discretionary income to put toward other investments, home upgrades, or paying down the mortgage balance.
When deciding your price range for purchasing a home, it’s also important to budget common maintenance costs, such as utilities, repairs, and upgrades, as well as homeowner’s insurance and property taxes. These costs can be substantial, yet many new homebuyers do not account for them in their budget. They only take into consideration whether or not they can afford the monthly mortgage. It is always a good idea to have a lower payment that you can well afford in order to avoid relying on savings or credit to pay for maintenance expenses as they arise. And remember, maintenance of your property is critical because it can help improve the sale price when you move, which is key to building wealth.
Building Home Equity
The next step to building wealth through homeownership is to sell for a substantial profit. Home equity, which is the market price for which you can sell the home minus your remaining mortgage balance, is achieved in two ways. One way to build equity relies on the real estate market. Over time, houses generally increase in price, so most people are able to sell their home for more than they paid for it. How quickly home prices rise depends on the overall economy and your home’s particular appeal. That’s why it’s important to make an attractive location one of your top requirements. For example, even if you don’t have children or want children, buying a home in a sought-after school district will likely increase the value of your home faster. Other location features include easy access to shopping districts, major highways, and even an airport.
The second way to build equity is through the monthly payments you make on the mortgage, which reduce the balance owed. If you can afford it, adding more to your monthly payment and directing the excess toward your principal balance helps build home equity faster. Another payment option that can help build equity faster is to apply for a shorter-term loan than the standard 30-year mortgage. For example, a 15-year term mortgage features a lower interest rate and the borrower pays off the loan in half the time. Note that monthly payments will be higher, but a homeowner can save thousands of dollars in interest with a shorter-term loan.
The garden-variety advice is to remain in your home for at least five years. That’s because selling your home and buying a new one involves substantial transaction expenses, from closing costs to initiating a new loan, as well as paying commission fees to both the seller’s and buyer’s real estate agents (usually three percent each). Therefore, you need to have lived in the property long enough to build equity through payments and market appreciation to offset these expenses and still make a profit.
Be aware that it is advantageous to live in your primary residence for at least two years before selling. Otherwise, your sales profit could be subject to capital gains taxes on the first $250,000 for single tax filers, and as much as $500,000 for married filing jointly. The tax rate is the same as your ordinary income tax rate if you owned the property for less than one year; after that, the capital gains rate is based on your tax bracket (15 percent or 20 percent).
Trade Up, Then Down
Over many decades, you can build wealth by buying a home and then periodically “trading up” once you attain substantial equity. The tactic of trading up means you invest your profits in a more expensive home and then begin building equity again. One way to save for retirement is to keep trading up until you retire, then downsize to a less expensive home with lower maintenance expenses. At that point, you can redeploy the profit derived from the home equity you have accumulated into a stream of retirement income.
In recent years, high prices and low inventory in the residential real estate market have made it harder for young adults to buy a starter home. For those currently shut out of the market, keep saving until the market stabilizes, because the higher your down payment, the lower your monthly payments will be – and the more equity you’ll have in your home. You can still build wealth through homeownership, even if you start late.
UPDATE: The Inflation Reduction Act: A Brief Overview of Potential New Legislation
On August 7, the U.S. Senate voted to pass the Inflation Reduction Act (IRA). The enormous bill—clocking in at 725 pages—contains a wide range of provisions and comes with a nearly $750 billion price tag. “The bill is fighting inflation and has a whole lot of collateral benefits as well,” said former Treasury Secretary Larry Summers, who reportedly helped craft the legislation.
While there are still hurdles to summit before the bill becomes law, it is important to remain aware of what is potentially in the works. Read on for an overview of the key items contained in the new act.
Provisions for Funding the IRA
In order to cover the $750 billion price tag of the IRA, the authors of the legislation included a variety of savings- and revenue-related provisions. Here is a breakdown of how the IRA will be funded (please note that the numbers are estimates from the Joint Committee on Taxation and the Congressional Budget Office):
- Savings in the Healthcare Arena ($288 billion)
- Repeal of a Trump-era drug rebate rule
- An inflation cap on drug prices
- An allowance for Medicare to negotiate certain drug prices
- New Revenue
- A new 15% corporate minimum tax for corporations with financial statement (“book”) income exceeding $1 billion ($313 billion)
- Increased revenue as a result of IRS tax enforcement funding ($124 billion)
- A 1% excise tax on corporate stock buybacks
- Methane and Superfund fees
How IRA Funds Will be Spent
So how will the $750 billion raised via savings and new revenue be spent? Here is a brief overview of initiatives included in the IRA (please note that the numbers are estimates from the Joint Committee on Taxation and the Congressional Budget Office):
- Climate & Energy Spending ($369 billion)
- Creation of new clean manufacturing tax credits
- Establishment of additional clean electricity grants and loans
- Creation of a new “Clean Energy Technology Accelerator”
- Incentivization of clean agriculture
- Incentivization of clean electronic vehicle manufacturing
- Additional energy and climate provisions
- Healthcare Spending ($64 Billion)
- A three-year extension of Obamacare subsidies for health care insurance costs
- A redesign of Medicare Part D and additional health care provisions
- IRS Funding
- Funding for increased IRS enforcement (namely, to enhance IT systems and compensate specialized employees—for more details, read IRS Commissioner Charles Rettig’s letter on the intended use of funding and plans for enforcement)
- Other Spending
- Reducing the Federal deficit ($300+ billion)
Now that the IRA Act has been approved by the Senate, it heads to the House. The new legislation is expected to pass easily in the Democratic-controlled body. Timing is yet to be announced; however, it is likely to move relatively quickly. Upon passage in the House, the IRA will be brought to President Biden for his signature.
As with any legislation in progress, details about the IRA remain up in the air until it is enacted by the President. Please be assured that your Ross Buehler Falk & Company, LLP accounting advisors are keeping a close watch on the progress of the IRA and will keep you apprised of any major developments.
The IRS is Auditing Fewer Returns than Ever
One of the perennial fears of taxpayers is getting audited by the IRS. Financially, few scenarios strike such fear into hearts. However, taxpayers can probably breathe a sigh of relief – at least for now. This is because the rate at which the IRS is initiating audits of individual taxpayers is dropping like a stone.
Decline in Audit Rates
The rate at which the IRS is auditing individual taxpayers has declined overall between the years 2010 and 2019 (2020 data is too new and 2021 returns are still being filed through the extension period). According to the Government Accountability Office (GAO), nearly 1 percent of all taxpayers were audited in 2010, compared to only 0.25 percent for the tax year 2019. The GAO chart below shows the ski slope-like drop in individual tax audit rates over the period.
While the IRS continues to audit higher-earning taxpayers more often overall, during the 10 years charted, audit rates consistently declined for all levels of taxpayers, except those with the highest incomes. The audit rate for taxpayers with income between $200k and $500k experienced the largest drop, with the audit rate declining from 2.3 percent down to 0.2 percent; a 92 percent reduction in audits. Taxpayers with the highest incomes, defined as $10 million or more, saw a resurgence in audit rates from 2017-2018; however, even they experienced an overall decline, dropping from 21.2 percent in 2019 to only 3.9 percent in 2019 – equating to an 81 percent decline.
Impact on the Treasury
There is a theory that the prospect of a tax audit leads to greater voluntary compliance. In other words, if people think they won’t get audited, then they are more likely to cheat on their taxes.
Non-compliance with tax laws and regulations has a material impact on the Treasury. According to the IRS, it is estimated that on average, individual taxpayers under-reported nearly $250 billion a year for the period 2011-2013. This leads to the non-collection of taxes that are otherwise owed to the government and raises issues of fairness for taxpayers who are playing by the rules.
Why the Decline in Audit Rates?
One of the main drivers is a lack of resources at the IRS, a combination of both reduced funding and fewer auditors on staff. The number of agents working for the IRS has declined across the board since 2011. Tax examiners, the type who handle basic audits by mail, have dropped by 18 percent. Meanwhile, revenue agents, who handle the more complex cases in the field, declined by more than 40 percent over the same period.
Demographics point to an increase in these trends as there is a wave of coming retirements in the IRS. Over the next three years, nearly 14 percent of current tax examiners and 16 percent of revenue agents are expected to retire. Stack on top of this is the fact that the inexperience of newer agents and the time to complete audits is also taking longer.
The IRS claims it is missing out on millions in legally due tax revenues due to the inability to maintain enforcement. They say they need more funding to hire more agents to perform more audits, which not only find fraud in the audits themselves but also increase overall compliance due to the pressure this creates.
Currently, there is no political focus on bringing significant new resources to the IRS, so we are not likely to see an uptick in individual tax audit rates anytime soon. The trend of focusing on the highest earners, however, will likely continue as this is where the IRS can find the most bang for its buck.
The Inflation Reduction Act: A Brief Overview of Potential New Legislation
On July 27, the legislative text of the Inflation Reduction Act (IRA) was made public. The enormous bill—clocking in at 725 pages—contains a wide range of provisions and comes with an $800 billion price tag. “The bill is fighting inflation and has a whole lot of collateral benefits as well,” said former Treasury Secretary Larry Summers, who reportedly helped craft the legislation.
According to a recent article from Vox, there are three big questions when it comes to the passage of the IRA:
- Will Arizona senator Kyrsten Sinema support the IRA?
- Will Democratic House moderates support the IRA?
- Will a vote on the IRA occur prior to the Senate’s annual summer recess, which is scheduled to begin on August 8?
While there are many hurdles to summit before the bill becomes law, it is important to remain aware of what is potentially in the works. Read on for an overview of the key items contained in the new act.
Provisions for Funding the IRA
In order to cover the $800 billion price tag of the IRA, authors of the legislation included a variety of savings- and revenue-related provisions. Here is a breakdown of how the IRA will be funded:
- Savings in the Healthcare Arena – $320 Billion
- Repeal of a Trump-era drug rebate rule ($120 Billion)
- An inflation cap on drug prices ($100 Billion)
- An allowance for Medicare to negotiate certain drug prices ($100 Billion)
- New Revenue – $470 Billions
- A new 15% corporate minimum tax ($315 Billion)
- Increased revenue as a result of IRS tax enforcement funding ($125 Billion)
- Closure of the carried interest loophole ($15 Billion)
- Methane and Superfund fees ($15 billion)
How IRA Funds Will be Spent
So how will the $800 billion raised via savings and new revenue be spent? Here is a brief overview of initiatives included in the IRA:
- Climate & Energy Spending – $385 Billion
- Creation of new clean manufacturing tax credits ($40 Billion)
- Establishment of additional clean electricity grants and loans ($30 Billion)
- Creation of a new “Clean Energy Technology Accelerator” ($30 Billion)
- Incentivization of clean agriculture ($30 Billion)
- Incentivization of clean electronic vehicle manufacturing ($20 Billion)
- Additional energy and climate provisions ($235 Billion)
- Healthcare Spending – $99 Billion
- A three-year extension of Obamacare subsidies for health care insurance costs ($64 Billion)
- A redesign of Medicare Part D and additional health care provisions ($35 Billion)
- IRS Funding – $80 Billion
- Funding for increased IRS enforcement
- Other Spending – $305 Billion
- Reducing the Federal deficit
As with any legislation in progress, pretty much everything about the IRA remains up in the air until it is enacted by the President. Please be assured that your Ross Buehler Falk & Company, LLP accounting advisors are keeping a close watch on the progress of the IRA and will keep you apprised of any major developments.
Divorce and Taxes – What Are the Implications?
This article explains the precautions to take when getting a divorce, and several tax concerns that need to be addressed to ensure that taxes are kept to a minimum and important tax-related decisions are properly made. Five issues to consider in the process of divorce include alimony or support payments, child support, personal residence, pension benefits, and business interests. Each spouse could save thousands on their home, up to $500,000 of avoidable tax, if they owned and used the residence as their principal residence for two of the previous five years. Another issue to consider if getting a divorce is deciding how to file your tax return. For more information on divorce accounting, click the link!
To view this article, click here to access the original content.
Local Accounting Firm Announces Promotion
Ross Buehler Falk & Company, LLP is pleased to announce the promotion of Sean R. Smith, CPA.
Smith joined Ross Buehler Falk & Company, LLP in 2013 and has spent his entire professional career with the firm. Prior to his promotion, Smith held the position of Senior Accountant II. He now takes on new responsibilities as Manager.
“Watching Sean progress in his career has been a true pleasure,” said Jeffrey Bleacher, CPA, CGMA, managing partner of Ross Buehler Falk & Company, LLP. “He has shown incredible dedication to our firm and our clients. He has grown his skill and knowledge over the years, and I am excited to see him excel in this new role.”
Smith graduated magna cum laude from York College of Pennsylvania with a Bachelor of Science in Criminal Justice. He earned his Master of Accounting and Financial Management from the Keller Graduate School of Management of DeVry University. He is a member of the American Institute of Certified Public Accountants (AICPA), Pennsylvania Institute of Certified Public Accountants (PICPA), and the Lancaster County Chamber of Commerce and Industry. An active member of the community, Smith currently serves as the treasurer of the board of trustees of the Lancaster Public Library, and has formerly served on the boards of Lancaster Young Professionals and Lancaster Safety Coalition as treasurer and secretary, respectively.
Employee Spotlight – Patrick Collins
Patrick Collins joined the Ross Buehler Falk & Company (RBF) team in 2022 as a manager in the firm’s tax department. In this role, he works with nearly all the firm’s tax clients, ensuring efficient returns and high-quality tax and compliance services. Patrick has extensive knowledge of the tax rules for fixed assets and business tax issues. His accounting industry experience, as well as his friendly personality and willingness to learn new skills makes him a valuable new member of the RBF team.
Patrick did not start off in the accounting field. For his undergraduate, he attended Temple University, where he studied film and media arts, graduating magna cum laude with a bachelor’s degree. His film background even earned him an IMDB credit. He worked as a production assistant on the 2011 film Bamboo Shark.
Patrick continued his education at Millersville University, eventually earning his Certified Public Accountant designation in both Maryland and Pennsylvania. He started his career in the accounting field in 2015, performing tax work for large corporations and complex partnerships with a Big Four firm. He gained further industry experience with a firm in Towson, Maryland, doing individual and small business returns, as well as trusts, estates, and nonprofit returns.
Originally from Red Lion, PA, Patrick currently lives in York with his fiancé and a menagerie of pets. The couple has one dog, one lizard, two cats, and a tank full of fish. Since moving back to the area, Patrick is thrilled by how diverse both Lancaster and York have become.
Want to get to know Parick even better? Here are a few fun facts about him:
- The last show Patrick binge-watched on Netflix was The Witcher.
- Patrick is a fan of Baltimore sports teams, especially the Orioles and the Ravens.
- Patrick likes to travel, and his favorite destinations are Ocean City, Maryland; Southern California; Southern Florida; and the United Kingdom.
- His favorite book is The Goal: A Process of Ongoing Improvement by Eliyahu M. Goldratt. He has found the thought process detailed in this book to be helpful.
- In his free time, Patrick likes to read, play video games, binge-watch TV shows, try new foods, and visit museums.
- His favorite Spotify radio station is “Energy Booster Indie.” He also enjoys listening to audiobooks via Audible.
The Majority of US Small Businesses Will Soon Face New Filing Requirements
New regulations regarding financial reporting for American businesses operating both domestically and overseas will soon go into effect.
In 2021, Congress passed the Corporate Transparency Act (CTA), which is a piece of legislation aimed at monitoring potential money laundering and other illicit activities. Businesses subject to the CTA will be required to provide information to the Financial Crimes Enforcement Network (FinCEN), an arm of the Department of the Treasury. The CTA requires the filing of a “beneficial owner report,” which furnishes key information about each beneficial owner of the business: full legal name, date of birth, residential street address, and identifying numbers from legal documents (e.g., driver’s license or passport). Failure to furnish the information required by the CTA can result in hefty penalties and even imprisonment.
Recently, FinCEN issued proposed regulations that include the following details:
- The CTA will go into effect upon finalization of the FinCEN regulations, which is expected to occur sometime in 2022.
- The CTA reporting requirements will apply to the majority of small businesses, including corporations, limited liability companies (LLCs), limited partnerships, limited liability partnerships, limited liability limited partnerships, and business trusts. Sole proprietorships and general partnerships are not subject to the CTA, and companies with more than 20 full-time employees and $5 million in gross receipts are also exempt.
- A “beneficial owner” is someone who own 25% or more of the company and who exercises substantial control over the company, either directly or indirectly.
Our accounting advisors are working diligently to remain up to date on new developments regarding the CTA and FinCEN reporting requirements. You can be confident that we will keep you apprised of the situation. Please do not hesitate to reach out with any questions or concerns.
Best Practices for Managing Your Business Through an Economic Downturn
The United States economy is nothing if not cyclical – which can be a good thing or a bad thing depending on when, exactly, you’re trying to operate a business.
According to one recent study, roughly 57% of small business owners say that they fear the U.S. economy will only get worse over the last year. Many are worried that if something doesn’t change, things could get as bad as they were in April 2020. Keep in mind that many of these small business owners are still very much feeling the impact of the onset of the COVID-19 pandemic that took place during that period of time.
But the key difference here is that nobody really saw the Coronavirus – or its long-lasting damage – coming at the time. Indeed, it took virtually everyone by surprise. Now, people have a chance to prepare themselves to hopefully mitigate as much risk from another such event as possible.
Your Business and the Economy: What You Need to Know
By far, the most important step that you can take to help protect and manage your business during an economic downturn involves paying more attention to your cash flow than ever.
Cash flow was always one of the biggest reasons why small businesses prematurely shutter their doors and the risk is even greater during the unpredictability of a downturn.
Therefore, to keep your business as healthy as possible, you need to do whatever it takes to bring in more income than you’re spending on expenses each month. This isn’t something you’re going to be able to do overnight – it’s not like flipping a light switch. You need to talk to your financial professional today to see what you can cut, if necessary, to help create a stable foundation from which to work from.
Along the same lines, if yours is a business that keeps an inventory on hand, you’ll want to take care to start reviewing your inventory management practices sooner rather than later.
Inventory is one of the biggest overhead costs for every organization and many see it as a “necessary evil.” But what they need to understand is that it doesn’t need to be nearly as large of a burden as some allow it to become.
Gather your team and see what you can do to reduce the amount of inventory you have on-site. Go over your analytics and historical reporting to make sure that you’re not producing more products than you’re actually selling. Oftentimes reducing the amount of inventory also allows you to reduce your warehousing costs as well because you’re no longer paying for products that are just sitting in a warehouse somewhere waiting to be sold.
In the run-up to any economic downturn, it is also important to double down on that which you do better than anyone else. As businesses continue to grow, they often add new products and services in the name of “diversification.” If the economy were verifiably strong, that would be a relatively decent time for experimentation. An economic downturn is not that time. Instead, focus on everything you do best and let the rest fall by the wayside for the time being. Remember that you’re not necessarily trying to grow bigger during this period – you’re trying to do what you have to in order to survive.
Finally, consider attempting to win over the customers of your competition now before things get particularly tricky in the marketplace. Figure out which of your competitors are most successful and pay attention to what they are doing. Do they have a particularly compelling value proposition? Do they know their audience better than you know yours?
Likewise, are there any gaps that you can identify that are potentially able to be taken advantage of? If you start winning over new customers today, you’ll increase the chances that they will be there for you when you truly need them tomorrow.
In the end, it’s simply not possible to avoid an economic downturn altogether. They’ve happened before and they will certainly happen again. But what you can do is make sure that you’re prepared for this inevitability, which is what these best practices are all about.
If you’d like to find out more information about what your small business can do to protect itself in the event of another economic downturn, or if you just have any additional questions that you’d like to go over with someone in a bit more detail, please don’t hesitate to contact our office today.
IRS Announces Mid-Year Optional Vehicle Mileage Rate Increase
With gas prices soaring it has been expected the IRS would increase the mileage rate that business owners can deduct for vehicle use instead of keeping a record of actual expenses. Sure enough, the IRS recently announced a 4-cent increase in the optional mileage rate for the last half of 2022.
The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the last 6 months of 2022, also up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022.
|Optional Mileage Rate for 2022|
|Purpose||1/1 through 6/30/22||7/1 through 12/31/22|
The standard mileage rate for businesses is based on a study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set and has been 14 cents for over 20 years.
The standard mileage rate is determined annually by the IRS using data from a study conducted by an independent contractor of vehicle-operating expenses based on the prior year’s costs. The rate includes:
- Maintenance and Repairs,
- Vehicle registration fees,
- Insurance, and
- Straight-line depreciation.
Not included in the standard rate, and deductible in addition to the optional rate, are:
- Tolls, and
- State and local property taxes attributable to business use.
Sales tax paid when the vehicle is purchased must be capitalized into the business basis of the vehicle, so it isn’t separately deductible.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates, which may produce a better result considering the skyrocketing fuel prices. Taxpayers can also switch from using the optional mileage rate in one year to actual expenses using straight line depreciation in the next year.
Please give our office a call if you have questions about the new rates or related to switching methods or which method you should use when putting a vehicle into service.