The Small Business Health Care Tax Credit

If you’re a small business owner with fewer than 25 full-time equivalent employees you may be eligible for the small business health care credit.

WHAT IS THE SMALL BUSINESS HEALTH CARE CREDIT?

The small business health care tax credit, part of the Patient Protection and Affordable Care Act enacted in 2010, is specifically targeted to help small businesses and tax-exempt organizations provide health insurance for their employees. Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit. Household employers not engaged in a trade or business also qualify.

HOW DOES THE CREDIT SAVE ME MONEY?

The tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers). The tax credit is highest for companies with fewer than 10 employees who are paid an average of $27,100 or less in 2019 ($26,600 in 2018). The smaller the business, the bigger the credit is. For example, if you have more than 10 FTEs or if the average wage is more than $27,100, the amount of the credit you receive will be less.

Note: The credit is available only if you get coverage through the SHOP Marketplace.

Here’s an example: If you pay $50,000 a year toward workers’ health care premiums–and you qualify for a 15 percent credit–you’ll save $7,500. If you save $7,500 a year from tax year 2017 through 2018, that’s a total saving of $15,000. And, if in 2019 you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.

IS MY BUSINESS ELIGIBLE FOR THE CREDIT?

To be eligible for the credit, you must cover at least 50 percent of the cost of single (not family) health care coverage for each of your employees. You must also have fewer than 25 full-time equivalent employees (FTEs), and those employees must have average wages of less than $50,000 a year. This amount is adjusted for inflation annually and in 2018 was $53,200.

Let’s take a closer look at what this means. A full-time equivalent employee is defined as either one full-time employee or two half-time employees. In other words, two half-time workers count as one full-timer or one full-time equivalent. Here is another example: 20 half-time employees are equivalent to 10 full-time workers. That makes the number of FTEs 10, not 20.

Now let’s talk about average wages. Say you pay total wages of $200,000 and have 10 FTEs. To figure average wages, you divide $200,000 by 10–the number of FTEs–and the result is your average wage. In this example, the average wage would be $20,000.

CAN TAX-EXEMPT EMPLOYERS CLAIM THE CREDIT?

Yes. The credit is refundable for small tax-exempt employers too, so even if you have no taxable income, you may be eligible to receive the credit as a refund as long as it does not exceed your income tax withholding and Medicare tax liability.

CAN I STILL CLAIM THE CREDIT EVEN IF I DON’T OWE ANY TAX THIS YEAR?

If you are a small business employer who did not owe tax during the year, you can carry the credit back or forward to other tax years. Also, since the amount of the health insurance premium payments are more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit. That’s both a credit and a deduction for employee premium payments.

CAN I FILE AN AMENDED RETURN AND CLAIM THE CREDIT FOR PREVIOUS TAX YEARS?

If you can benefit from the credit this year but forgot to claim it on your tax return there’s still time to file an amended return.

Businesses that have already filed and later find that they qualified in 2016 or 2017 can still claim the credit by filing an amended return for one or both years.

Don’t hesitate to call if you have any questions about the small business health care credit.

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Pros and Cons of Filing a Tax Extension

Obtaining a 6-month extension to file is relatively easy and there are legitimate reasons for doing so; however, there are also a few downsides. If you need more time to file your tax return this year, here’s what you need to know about filing an extension.

WHAT IS AN EXTENSION OF TIME TO FILE?

An extension of time to file is a formal way to request additional time from the IRS to file your tax return, which in 2019, is due on April 15 (if you live in Maine or Massachusetts you may file by April 17). Anyone can request an extension and you don’t have to explain why you’re asking for more time.

Note: Special rules may apply if you are serving in a combat zone or a qualified hazardous duty area or living outside the United States. Please call the office if you need more information.

Individuals are automatically granted an additional six months to file their tax returns. In 2019, the extended due date is October 15. Businesses can also request an extension. In 2019, the deadline for S-corporations and Partnerships is September 16 and October 15 for C-corporations.

Caution: Taxpayers should be aware that an extension of time to file your return does not grant you any extension of time to pay your taxes. In 2019, April 15 is the deadline for most to pay taxes owed and avoid penalty and interest charges.

WHAT ARE THE PROS AND CONS OF FILING AN EXTENSION?

As with most things, there are pros and cons to filing an extension. Let’s take a look at the pros of getting an extension to file first.

Pros

1. You can avoid a late-filing penalty if you file an extension. The late filing penalty is equal to 5 percent per month on any tax due plus a late payment penalty of half a percent per month.

Note: If you are owed a refund and file late, there are no penalties for late filing.

2. You can also avoid the failure to file penalty if you file an extension. if you file your return more than 60 days after the due date (or extended due date), the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

3. You are able to file a more accurate–and complete–tax return. Rather than rushing to prepare your return (and possibly making mistakes), you will have an extra 6 months to gather up required tax records, especially if you are still waiting for tax documents that haven’t arrived or need more time to organize your tax documents in support of deductions.

4. If your tax return is complicated then your tax preparer or accountant will have more time available to work on your return to make sure you can take advantage of every tax credit and deduction you are entitled to under the tax code.

5. If you are self-employed, you’ll have extra time to fund a retirement plan. Individual 401(k) and SIMPLE plans must have been set up during the tax year for which you are filing, but it’s possible to fund the plan as late as the extended due date for your prior year tax return. SEP IRA plans may be opened and funded for the previous year by the extended deadline as long as an extension has been filed.

6. Filing an extension preserves your ability to receive a tax refund when you file past the extension due date. Filers have three years from the date of the original due date (e.g., April 15, 2019) to claim a tax refund. However, if you file an extension you’ll have an additional six months to claim your refund. In other words, the statute of limitations for refunds is also extended.

Cons

1. If you are expecting a refund, you’ll have to wait longer than you would if you filed on time.

2. Extra time to file is not extra time to pay. If you don’t pay a least 98 percent of the tax due now, you will be liable for late-payment penalties and interest. The failure to pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25% of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. If you are not able to pay, the IRS has a number of options for payment arrangements. Please call the office for details.

3. When you request an extension you will need to estimate your tax due for the year based on information available at the time you file the extension. If you disregard this, your extension could be denied and if you filed the extension at the last minute assuming it would be approved (but wasn’t) you may owe late filing penalties as well.

4. Dealing with your tax return won’t be any easier 6 months from now. You will still need to gather your receipts, bank records, retirement statements and other tax documents–and file a return.

If you feel that you need more time to prepare your federal tax return, then filing an extension of time to file might be the best decision. If you have any questions or are wondering if you need an extension of time to file your tax return, don’t hesitate to contact the office.

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Seven Common Small Business Tax Myths

The complexity of the tax code generates a lot of folklore and misinformation that could lead to costly mistakes such as penalties for failing to file on time or, on the flip side, not taking advantage of deductions you are legally entitled to take and giving the IRS more money than you need to. With this in mind, let’s take a look at seven common small business tax myths.

1. START-UP COSTS ARE DEDUCTIBLE IMMEDIATELY

Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start-up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start-up and organizational costs are generally called capital expenditures.

Costs for a particular asset such as machinery or office equipment are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.

Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs. The $5,000 deduction is reduced (but not below zero) by the amount your total start-up or organizational costs exceed $50,000. Remaining costs must be amortized.

2. OVERPAYING THE IRS MAKES YOU “AUDIT PROOF”

It is never a good idea to knowingly or unknowingly overpay the IRS. You should only pay the amount of tax that you owe. The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes; however, they do care if you pay less than you owe and you can’t substantiate your deductions with good recordkeeping. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. YOU CAN TAKE MORE DEDUCTIONS IF YOUR BUSINESS IS INCORPORATED.

The good news is that self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do. As such, becoming incorporated is often an unnecessary expense and burden that many small business owners don’t need. For instance, start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or take the company in a different direction. Furthermore, plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

4. THE HOME OFFICE DEDUCTION IS A RED FLAG FOR AN AUDIT.

While the home office deduction used to be a red flag, this is no longer true. In fact, with so many people operating home-based businesses the IRS rolled out a new simplified home office deduction in 2013, which makes it even easier to claim the home office deduction (as long as it can be substantiated with excellent recordkeeping).

Furthermore, because of the proliferation of home offices, tax officials cannot possibly audit all tax returns of small business owners taking the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction; however, a high deduction-to-income ratio, however, may raise a red flag and lead to an audit.

5. YOU CAN’T DEDUCT BUSINESS EXPENSES IF YOU DON’T TAKE THE HOME OFFICE DEDUCTION.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

6. AN EXTENSION TO FILE GIVES YOU AN EXTRA SIX MONTHS TO PAY ANY TAX YOU OWE.

Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.

7. PART-TIME BUSINESS OWNERS CANNOT SET UP SELF-EMPLOYED PENSION PLANS.

If you start a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

If you have any questions about these and other tax myths, don’t hesitate to call and speak to a tax professional.

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Tax Filing Season Begins

January 28, 2019, marked the start of this year’s tax filing season, and it’s the first time taxpayers will be filing under the new tax reform laws, most of which became effective in 2018. Complicating matters is a newly revised Form 1040, U.S. Individual Income Tax Return, as well as the partial shutdown of the federal government. With more than 150 million individual tax returns expected to be filed for the 2018 tax year, here’s what individual taxpayers can expect:

GOVERNMENT SHUTDOWN; FILING AS USUAL, TAX REFUNDS ON SCHEDULE

Despite the government shutdown (referred to by the IRS as the lapse in appropriations) in December and January, all taxpayers should continue to meet their tax obligations as per the normal time frame. That is, individuals and businesses should continue to file tax returns and make payments and deposits with the IRS, as required by law. For taxpayers receiving tax refunds there are no anticipated delays due to the lapse in appropriations.

NEW DESIGN FOR FORM 1040

The new Form 1040 has been redesigned for 2018. It is now “postcard sized” and gathers information about the taxpayer(s) and dependents. It’s also the form you need to sign and date when filing your return. The new Form 1040 can also be filed by itself; however, more complex tax situations will generally require using one or more of the supplemental Schedules 1 through 6 (also new for 2018), which are briefly described below.

Note: Forms 1040A and 1040EZ no longer exist for tax year 2018. Instead, use the new Form 1040.

SCHEDULES 1 THROUGH 6

As mentioned, these supplemental schedules are to be used as needed and are generally for those with more complex tax returns.

Schedule 1, Additional Income and Adjustments To Income – Report income or adjustments to income that can’t be entered directly on Form 1040.

Schedule 2, Tax – To be used if you have additional taxes that can’t be entered directly on Form 1040. These include alternative minimum tax and excess advance premium tax credit repayment.

Schedule 3, Nonrefundable Credits – Used to report nonrefundable credits other than the child tax credit or the credit for other dependents.

Schedule 4, Other Taxes – If you have other taxes that can’t be entered on Form 1040 such as additional tax on IRAs or other qualified retirement plans or household employment taxes.

Schedule 5, Other Payments and Refundable Credits – If you have other payments or refundable credits such as any estimated tax payments for 2018 or the amount paid when requesting an extension to file.

Schedule 6, Foreign Address and Third Party Designee – If you have a foreign address or want to allow another person (other than your paid tax preparer) to discuss this return with the IRS.

FILING DEADLINE

For most taxpayers the filing deadline to submit 2018 tax returns is Monday, April 15, 2019; however, due to the Patriots’ Day holiday on April 15 in Maine and Massachusetts, and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17, 2019 to file their returns.

HELP IS JUST A PHONE CALL AWAY.

Don’t hesitate to contact the office if you have any questions about the new tax forms or need assistance preparing and filing your tax return this year.

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Standard Mileage Rates for 2019

Starting January 1, 2019, the standard mileage rates for the use of a car, van, pickup or panel truck are as follows:

  • 58 cents per mile driven for business use, up 3.5 cents from the rate for 2018
  • 20 cents per mile driven for medical or moving purposes, up 2 cents from the rate for 2018.
  • 14 cents per mile driven in service of charitable organizations.

The business mileage rate increased 3.5 cents for business travel miles driven and 2 cents for medical and certain moving expense from the rates for 2018. The charitable rate remains unchanged.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

Prior to tax reform, these optional standard mileage rates were used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. However, it is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses. Taxpayers also cannot claim a deduction for mileage related to moving expenses, except members of the Armed Forces on active duty moving under orders to a permanent change of station.

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 more than four vehicles used simultaneously. Please call if you need additional information about these and other special rules.

If you have any questions about standard mileage rates or which driving activities you should keep track of as the new tax year begins, do not hesitate to contact the office.

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Recap of Business Tax Provisions for 2018

Here’s what business owners need to know about tax changes for 2018.

 

Standard Mileage Rates 
The standard mileage rate in 2018 is 54.5 cents per business mile driven.

Health Care Tax Credit for Small Businesses 
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000 (adjusted annually for inflation). In 2018 this amount is $53,200.

In 2018 (as in 2014-2017), the tax credit is worth up to 50 percent of your contribution toward employees’ premium costs (up to 35 percent for tax-exempt employers. For tax years 2010 through 2013, the maximum credit was 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.

Section 179 Expensing and Depreciation

Under the Tax Cuts and Jobs Act of 2017, the Section 179 expense deduction increases to a maximum deduction of $1 million of the first $2,500,000 of qualifying equipment placed in service during the current tax year. The deduction was indexed to inflation after 2018 and enhanced to include improvements to nonresidential qualified real property such as roofs, fire protection, and alarm systems and security systems, and heating, ventilation, and air-conditioning systems.

Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. The standard business depreciation amount is 25 cents per mile (same as 2017).

Please call if you have any questions about Section 179 expensing and the bonus depreciation.

Work Opportunity Tax Credit (WOTC)

Extended through 2019, the Work Opportunity Tax Credit remained under tax reform and can be used by employers who hire long-term unemployed individuals (unemployed for 27 weeks or more). It is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. Please call if you have any questions about the Work Opportunity Tax Credit.

SIMPLE IRA Plan Contributions
Contribution limits for SIMPLE IRA plans increased to $12,500 for persons under age 50 and $15,500 for persons age 50 or older in 2018. The maximum compensation used to determine contributions is $275,000.

Please contact the office if you would like more information about these and other tax deductions and credits to which you are entitled.

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Year in Review: Tax Changes for Individuals

The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated or modified numerous tax provisions starting in 2018. Here’s what individuals and families need to know as they get ready for tax season.

Personal Exemptions 
Personal exemptions are eliminated for tax years 2018 through 2025.

Standard Deductions
The standard deduction for married couples filing a joint return in 2018 is $24,000. For singles and married individuals filing separately, it is $12,000, and for heads of household, the deduction is $18,000.

The additional standard deduction for blind people and senior citizens in 2018 is $1,300 for married individuals and $1,600 for singles and heads of household.

Income Tax Rates 
In 2018 the top tax rate of 37 percent affects individuals whose income exceeds $500,000 ($600,000 for married taxpayers filing a joint return). Marginal tax rates for 2018 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. While the tax rate structure remains similar to prior years (i.e., with seven tax brackets), the tax-bracket thresholds increased significantly for each filing status under tax reform.

Estate and Gift Taxes 
In 2018 there is an exemption of $11.18 million per individual for estate, gift, and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $15,000.

Alternative Minimum Tax (AMT) 
For 2018, exemption amounts increased to $70,300 for single and head of household filers, $109,400 for married people filing jointly and for qualifying widows or widowers, and $54,700 for married taxpayers filing separately.

Pease and PEP (Personal Exemption Phaseout) 
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been eliminated under TCJA.

Flexible Spending Account (FSA) 
A Flexible Spending Account (FSA) is limited to $2,650 per year in 2018 (up from $2,600 in 2017) and applies only to salary reduction contributions under a health FSA. The term “taxable year” as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Long-Term Capital Gains 
In 2018 tax rates on capital gains and dividends remain the same as 2017 rates (0%, 15%, and a top rate of 20%); however, threshold amounts are different in that they don’t correspond to the tax bracket structure as they did in the past. For example, taxpayers whose income is below $38,600 for single filers and $77,200 for married filing jointly pay 0% capital gains tax. For individuals whose income is at or above $425,800 ($479,000 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.

Miscellaneous Deductions
Miscellaneous deductions exceeding 2% of AGI (adjusted gross income) are eliminated for tax years 2018 through 2025. As such, you can no longer deduct on Schedule A expenses related to tax preparation, moving (except for members of the Armed Forces on active duty who move because of a military order), job hunting, or unreimbursed employee expenses such as tools, supplies, required uniforms, travel, and mileage. Business owners are not affected and can still deduct business-related expenses on Schedule C.

INDIVIDUALS – TAX CREDITS

Adoption Credit 
In 2018 a nonrefundable (i.e., only those with tax liability will benefit) credit of up to $13,810 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit 
The Child and Dependent Care Tax Credit was permanently extended for taxable years starting in 2013 and remained under tax reform. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit and Credit for Other Dependents
For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child, up from $1,000 in 2017, thanks to the passage of the TCJA. The refundable portion of the credit increases from $1,000 to $1,400 – 15 percent of earned income above $2,500, up to a maximum of $1,400 – so that even if taxpayers do not owe any tax, they can still claim the credit. Please note, however, that the refundable portion of the credit (also known as the additional child tax credit) applies only when the taxpayer isn’t able to fully use the $2,000 nonrefundable credit to offset their tax liability.

Under TCJA, a new tax credit – Credit for Other Dependents – is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.

Earned Income Tax Credit (EITC)
For tax year 2018, the maximum earned income tax credit (EITC) for low and moderate-income workers and working families increased to $6,431 (up from $6,318 in 2017). The maximum income limit for the EITC increased to $54,884 (up from $53,930 in 2017) for married filing jointly. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.

INDIVIDUALS – EDUCATION EXPENSES

Coverdell Education Savings Account 
You can contribute up to $2,000 a year to Coverdell savings accounts in 2018. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit
For 2018, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Lifetime Learning Credit 
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2018, the modified adjusted gross income threshold at which the Lifetime Learning Credit begins to phase out is $112,000 for joint filers and $56,000 for singles and heads of household.

Employer-Provided Educational Assistance 
As an employee in 2018, you can exclude up to $5,250 of qualifying postsecondary and graduate education expenses that are reimbursed by your employer.

Student Loan Interest 
In 2018 you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $135,000 (married filing jointly). The deduction is phased out at higher income levels.

INDIVIDUALS – RETIREMENT

Contribution Limits
For 2018, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $18,500 ($18,000 in 2017). For persons age 50 or older in 2018, the limit is $24,500 ($6,000 catch-up contribution).

Retirement Savings Contributions Credit (Saver’s Credit)
In 2018, the adjusted gross income limit for the saver’s credit for low and moderate-income workers is $63,000 for married couples filing jointly, $47,250 for heads of household, and $31,500 for married individuals filing separately and for singles. The maximum credit amount is $2,000 ($4,000 if married filing jointly). Also of note is that starting in 2018, the Saver’s Credit can be taken for your contributions to an ABLE (Achieving a Better Life Experience) account if you’re the designated beneficiary. However, keep in mind that your eligible contributions may be reduced by any recent distributions you received from your ABLE account.

If you have any questions about these and other tax provisions that could affect your tax situation, don’t hesitate to call.

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