Is a Roth IRA Conversion Right for You?

If you have a traditional IRA, you may want to consider converting to a Roth IRA. Learn about the difference between a traditional and Roth IRA, the costs of converting, and how to determine if you’d benefit from a conversion.

< back to insights gallery

Is a Roth IRA Conversion Right for You?

Article | November 11, 2022 | Authored by KDP LLP

Should I convert my retirement plan to a Roth IRA? It’s an important question, particularly considering the Biden administration’s intent to raise taxes on high-earning individuals. Given the often-sizable nest egg that people have accumulated during their careers, converting to a Roth IRA may be a smart move.

Roth vs. Traditional: What’s the Difference? 

Taxes now or taxes later. Simply put, that is the main difference between a Roth and Traditional IRA. 

Contributions to a Roth IRA are made post-tax, but withdrawals are made tax-free. While contributions can be withdrawn at any time tax-free, earnings from the IRA cannot be withdrawn without penalty until age 59.  

Contributions to a traditional IRA are made pre-tax, but withdrawals are taxed as ordinary income. Individuals must wait until age 59½ to begin withdrawing funds without penalty and are required to start taking minimum distributions at age 72.   

A Roth IRA is often beneficial for individuals who expect to be in a higher tax bracket in the future. Those individuals can contribute now at a lower tax rate and then avoid paying taxes at a higher rate in the future. Likewise, a traditional IRA is often beneficial if the individual will be in the same or lower tax bracket in the future.

For estate planning, a Roth IRA may have two significant benefits. First, a traditional IRA forces an individual to take minimum distributions and pay taxes on those distributions, even if they don’t need them. A Roth IRA does not require any distributions. Second, a Roth IRA enables an individual’s heirs to withdraw funds tax-free, whereas the beneficiaries of an inherited traditional IRA will incur taxes on distributions. 

Cost of Conversion

When an individual converts a traditional IRA to a Roth IRA, the contributions and earnings in the traditional IRA account will be considered ordinary income and taxed as such. 

An individual must also be aware that the income realized from the conversion could push them into a higher tax bracket for the year and thus must make those calculations.  

Fortunately, there are no penalties for conversions, and account holders will avoid the typical 10% that the IRS charges for early retirement withdrawals. 

Tax Rates and Considerations

Which will be higher: your tax burden now, during conversion, or your tax burden during retirement, when you take distributions? That’s the million-dollar question. 

The Tax Cuts and Jobs Act reduced individual income tax rates from 2018 through 2025. Unless Congress enacts new legislation to cut taxes, rates will increase in 2026. Furthermore, the Biden administration would like to pass legislation increasing both spending and taxes. Even though the Build Back Better bill did not pass the Senate, it doesn’t mean that components of the bill won’t be carved out into smaller pieces of legislation and passed.  

Regardless of how Congress affects future tax rates, an individual may experience a higher or lower future tax rate purely due to their future income level. An individual who is early in their career or a shareholder in a growing company may have higher earnings in the future and be pushed into a higher tax rate.  

Where someone plans to live out their golden years also matters. Federal laws apply across the board, but state laws vary in how they tax retirement income. In some states, required distributions from IRAs are not included in state income tax. 

Future tax rates are important for those who plan on taking distributions during retirement. However, individuals who don’t plan on taking distributions and instead want to leave the funds for their heirs would benefit from a Roth IRA. Heirs are not taxed on Roth accounts and will also have several options for withdrawing funds from it.

As you can see, there are many things to consider when it comes to retirement planning and potentially converting your traditional IRA to a Roth IRA. This article only provides a high-level overview and is not a substitute for speaking with one of our expert advisors. Please get in touch with our office if you would like to discuss your specific situation and determine the best path for you and your family. We’re always happy to help.

 

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

How a spendthrift trust helps protect assets

When creating an estate plan, many people fear that their money and assets will be squandered haphazardly by the beneficiaries. To help protect against this, you may want to consider using a spendthrift trust. 

< back to insights gallery

How a spendthrift trust helps protect assets

Article | November 11, 2022 | Authored by KDP LLP

When creating an estate plan, you’ll have to make several important decisions about what happens to your assets once you can no longer enjoy them. Many people fear that the money and assets that they’ve earned over a lifetime will be squandered haphazardly or lost to a creditor. Heirs might spend too much, be manipulated for money, or become victim to litigation, any of which could drain a lifetime of earnings. To help protect against these situations, you may want to consider using a spendthrift trust. 

A spendthrift trust provides certain protections over trust assets and how and when they are distributed to beneficiaries. In this article, we’ll explain what a spendthrift trust is and why they are used.

What is a spendthrift trust?

A spendthrift trust can provide a beneficiary with distributions over time instead of a lump-sum inheritance. Contrary to the name, it is not a specific kind of trust but is a clause that can be included in any type of trust. The term “spendthrift” came about because of the clause’s use for passing money or assets to individuals who have difficulty managing money. While that purpose remains true today, there are several other strategic reasons people use spendthrift clauses in their trusts.

Protection from creditors

A significant benefit of a spendthrift trust is creditor protection. 

If the trust is not already irrevocable, it will become irrevocable upon the grantor’s death. The terms written into an irrevocable trust cannot be modified in any way, nor can anyone add or remove assets unless specified by the terms. 

Creditors of a beneficiary cannot seize or gain an interest in trust assets so long as the assets remain in the trust. This is because the assets do not become the beneficiary’s property until they are disbursed. And, there is no way to compel a beneficiary to access the trust assets because distributions are controlled by the trustee per the terms of the trust.

Finally, a spendthrift trust typically prohibits the beneficiary from assigning their rights to future payments from the trust. This prevents the beneficiary from obtaining a loan secured by future payments from the trust.

Control over distributions

Beyond the creditor protections, another benefit of a spendthrift trust is that it enables grantors to maintain a certain level of control over their assets after passing away.

Maybe a beneficiary is a child or grandchild who has not fully matured, whose financial habits have not yet become clear. Maybe the assets are intended to benefit multiple generations, so distributing it in smaller sums protects against rapid or reckless spending. Or maybe a beneficiary has irresponsible or erratic spending habits, and holding the money for a longer time restrains instincts that would otherwise lead them astray.

Whether it is one of those reasons or another, a spendthrift trust provides the unique advantage to exert some control over their assets, even after they pass.

Control through generations

The terms of a spendthrift trust can specify what happens upon the death of a beneficiary. For example, suppose a married beneficiary passes away before their spouse. The terms can specify whether specific assets in the trust are allocated to the surviving spouse, children, or other beneficiaries. This ensures that assets are disbursed in a way that most closely matches a grantor’s wishes.

Who governs the trust?

A trustee oversees the funding and manages the trust assets per the terms of the trust. Generally, the trustee is the sole person who interacts directly with trust assets, serving as an intermediary between the assets and the recipients. 

The trustee is appointed to the trust and is either an individual or an institution. Usually, grantors choose a family friend or a financial institution they trust. Reliability and strength of character are critical attributes of a trustee since the administration of funds can be ensnared in legal battles and property issues.

Planning what will happen with your assets after you pass away can be daunting. A spendthrift trust is one of several tools that can help ensure that your assets go as far as possible. While this article provides a brief overview of a spendthrift trust, it is not a substitute for speaking to one of our expert advisors. Please contact our office if you are interested in learning more about building your estate plan and perhaps setting up a spendthrift trust.

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. 

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

Changes to the treatment of R&E expenditure under Section 174

Changes to the way that research and experimentation (R&E) expenses are treated under Section 174 of the Internal Revenue Code became effective as of January 1, 2022. Learn about these changes and how they might affect your business.

Changes to the treatment of R&E expenditure under Section 174

Article | November 11, 2022 | Authored by KDP LLP

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about a number of changes to the way that research and experimentation (R&E) expenses are treated under Section 174 of the Internal Revenue Code. While many provisions of the TCJA went into effect immediately, changes to Section 174 were only effective after December 31, 2021 – meaning businesses will have to navigate these new changes in the 2022 tax year. 

At its core, Section 174 of the Internal Revenue Code (IRC) provides certain tax benefits for companies that incur R&E expenditures incurred in connection with the taxpayer’s trade or business. R&E expenditures generally include all costs incurred in the development or improvement of a product. (26 CFR § 1.174-2).  

Prior to the TCJA Amendment to Section 174, taxpayers could deduct the full cost of R&E expenditures in the year they were incurred. Now, however, these costs must be amortized over at least 5 years. Fundamentally, this means that businesses will see an increase in taxable income the first year those expenses are incurred. 

Overview of the changes

The TCJA amendment to section 174 requires taxpayers to capitalize and amortize their R&E expenditures from the midpoint of the taxable year in which expenses are incurred. Prior to the TCJA, taxpayers could immediately deduct R&E expenditures or amortize the expenditures over a period of 5 (for domestic expenses) or 15 years (for foreign expenses). Most taxpayers opted to use the immediate deduction, but that option will no longer be available. This change will likely lead to a year one increase in taxable income, but businesses could see increased deductions for subsequent years if they were previously deducting expenses up-front.

For instance, if a business has $1 million in domestic R&E expenses for a calendar year, it must amortize $1 million over five years ($200,000 annually) instead of taking a $1 million deduction in the first year, as was the case in the past. Also, they must amortize the expenses from the midpoint of the year, potentially cutting the first year’s deduction in half. In this case, that means the business can only deduct $100,000 in the first year, instead of the entire $1 million. 

Additionally, the research expenses that must be capitalized are broader than those typically associated with R&E costs under section 41 of the IRC. Section 41 of the IRC provides for a tax credit (called the Credit for Increased Research Activity) for certain R&E expenditures, but it only covers a narrow range of R&E costs that are not the same as those defined under Section 174. In a nutshell, costs eligible for the deduction under Section 174 are broader than costs eligible for the credit under section 41. 

For example, the Section 41 credit applies to salaries, supplies, and contract research, while the Section 174 deduction can include expenses for things like utilities, depreciation, attorneys’ fees, and other costs incident to the development or improvement of a product. 

This difference between eligible expenses means taxpayers will have to partition and calculate Section 174 expenditures separately from expenditures eligible for the Section 41 credit as the Section 174 expenditures will need to be amortized. 

What these changes mean for businesses and their accountants

As a result of the Section 174 changes, some taxpayers may have to file an Application for Change in Accounting Method (Form 3115) if they were not previously amortizing their R&E expenses. Businesses also need to ensure all R&E expenditures are properly identified as a result of these new guidelines. 

For those companies who were already capitalizing and amortizing their R&E expenditures, the Section 174 changes will be minimal – but it stands to dramatically affect businesses who were deducting the full cost of R&E expenses in the year incurred. 

Contact our office for assistance

While this article provides an overview of changes to the Internal Revenue Code, it is not a substitute for speaking with an expert advisor. If you’d like to learn more about R&E deductions or credits, contact our office and we’ll discuss your unique situation.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

Understanding long-term care and insurance

Unfortunately, many of us will need long-term care at some point in our lives. In this article, we explore the average costs of long-term care and the different methods of paying for it. 

< back to insights gallery

Understanding long-term care and insurance

Article | November 11, 2022 | Authored by KDP LLP

It’s not a topic that many people like to think about, but unfortunately, most of us will need long-term care at some point in our lives.

According to the U.S. Department of Health and Human Services, 70 percent of people over age 65 will require some type of long-term care service during their lifetimes. Women typically need care for an average of 3.7 years, while men need care for 2.2 years. 

The cost of long-term care can be prohibitive, especially if you need to rely on professional service providers for an extended period of time. Fortunately, there are ways to help offset those costs. One option is long-term care insurance. 

As its name suggests, long-term care (LTC) insurance is a policy that helps pay for the costs of long-term care. This can include assisted living, home health care, adult day care, and nursing home care. 

In this overview of LTC insurance, we’ll explore the average costs of long-term care and the different methods of paying for it. 

The average costs of long-term care 

Long-term care (LTC) services provide help to seniors who cannot perform some of the activities of daily living on their own or who have social, emotional, or cognitive problems that make it difficult for them to live independently. The cost of these services varies greatly depending on several factors, including the type of service needed. 

Let’s take a closer look at the average expenses across the spectrum of LTC services, from assisted living to nursing homes. The cost estimates provided are based on national averages compiled by Genworth’s Cost of Care Survey (2021).

Home Health Care

Home health care generally includes part-time services provided by a visiting nurse, physical therapist, home health aide, or other health care professional. Individuals who benefit from home health care tend to be independent and capable of performing most daily activities without assistance. 

In 2021, home healthcare costs averaged around $5,000 per month nationally.

Assisted Living Facility

Assisted living provides personal care in a housing setting where residents have a private room furnished with their items. Services are provided by trained staff during certain hours when residents need help with activities of daily living. Assisted living facilities usually have limits on the types of care they will provide. They often do not accept residents who require daily help with medication management, meal preparation or cooking, and other services. 

In 2021, assisted living costs averaged $4,500 per month nationally. 

Nursing Home

Nursing homes provide care to individuals who need assistance with basic daily activities as well as health and nursing care. Nursing homes vary in their services, and the amount of care residents receive. Some nursing homes provide intensive, around-the-clock skilled nursing and medical supervision, while others offer less extreme custodial care for residents.

As of 2021, the average monthly cost nationwide for a private room in a nursing home was $9,034; this includes nursing services, personal care assistance with activities of daily living, medication management, and more. A semi-private room averaged $7,908 per month.

Adult Day Care

Adult day care centers provide professional care for elderly adults who need assistance and supervision during the day. Typically, adult day care centers offer planned programs that enable seniors to socialize and enjoy structured activities in a group setting while also receiving health services as needed. Like nursing homes and assisted living facilities, services and the level of care offered differ from one day care to the next. Centers that provide more comprehensive medical care are often costlier than facilities that only focus on social and recreational activities.  

In 2021, adult day care centers charged an average of $78 per day for up to 8 hours of structured activities and care. This cost typically includes meals, social activities, and basic health services. However, the cost increases for facilities that provide more comprehensive medical services like medication management or occupational therapy for those with health conditions. 

Factors that influence costs

Not only do costs differ based on the type and amount of services provided, but your region of the country also has a significant impact on pricing. In addition to the type of services you need and where you live, there are other factors that impact costs like: 

  • Length of time needed – the longer a person needs LTC services, the more it will cost. 
  • Age – the older you are when you start an LTC service, the more expensive it is likely to be. 
  • Healthcare providers – For some types of long-term care, the provider you use can impact costs. For example, home health aides typically cost less than registered nurses.
  • Sex – women typically pay more for LTC because they tend to live longer than men. 
  • Health – the more health problems you have and the greater their severity, the more you’ll pay for long-term care. 

Options to cover the costs of long-term care

Long-term care is often paid out-of-pocket, using personal savings or funds from one’s retirement account. However, there are other options available to help defray the cost, including Medicare, Medicaid, Life Insurance, Long-Term Care Insurance, and Hybrid Policies.

Medicare

Medicare is a federal health insurance program for those aged 65 and older and does not cover most long-term care services. Medicare Part A covers some stays in skilled nursing facilities following a hospital stay of at least three days. However, it usually requires co-insurance payments for days 21-100. Additionally, Medicare Part A does not cover the entire cost of skilled nursing care; it only covers up to 100 days of such care in every benefit period. 

Medicaid

Individuals with limited income and resources may qualify to receive government-sponsored healthcare assistance for long-term care services (including assisted living and nursing home care). Medicaid is a state-administered program, so eligibility criteria vary, and it can take several months to begin receiving Medicaid benefits even if you qualify. It’s important to note that individuals who are eligible for Medicaid may not be able to use LTC insurance. 

Life Insurance

Some life insurance policies may help pay for long-term care costs or allow the policyholder to transfer all or some of their death benefit to an irrevocable trust for care. These policies usually require that the benefits be used for long-term care and not other expenses such as funeral expenses. 

Long-Term Care Insurance

Long-term care insurance is a policy that helps cover the cost of long-term care services. It can help pay for home health aides and nurses, adult daycare, respite care, nursing home care, and assisted living facilities. Some LTC policies may even cover home improvements designed to make a house more accessible for the elderly, like a wheelchair ramp or handrails. 

It’s worth noting that not everyone qualifies for LTC insurance. Providers may deny those who are already in poor health requiring end-of-life care. As such, it’s essential to consider LTC insurance long before you need it. 

Hybrid Policies

Hybrid policies combine long-term care benefits with other benefits like life insurance or an annuity. Typically, these policies provide LTC coverage in addition to a life insurance benefit that will be distributed to your heirs if the LTC benefits aren’t used. If you need long-term care, the associated life insurance payout is reduced (or used entirely) based on the amount paid for long-term care. Many people like hybrid policies because it reduces the risk of paying for LTC insurance and not needing it – if such a situation arises with a hybrid policy, heirs are still entitled to benefits.

Benefits of long-term care insurance

There are a  few significant advantages that everyone should know about when it comes to long-term care insurance. First and foremost is the peace of mind that comes with knowing you’re prepared for the future. If something happens and you need long-term care, having insurance will help you afford the best possible care without breaking the bank. 

Other advantages of owning an LTC insurance policy include: 

  • Paying a fixed premium price – the cost of your policy will not go up, even if the cost of long-term care services rises. 
  • Choice of benefits and duration – you can choose the amount and type of coverage you want when purchasing a policy. 
  • Protection against inflation – if you choose to purchase a policy with an inflation rider, your benefits can increase over time. 
  • Premiums may be tax-deductible – If you meet certain income thresholds and make payments toward a tax-qualified insurance policy, your premiums may be deductible (up to certain limits, based on your age). 

While LTC insurance costs vary from policy to policy, it is not inexpensive. However, the younger you are when you buy a policy, the less expensive it will be. That being said, you can cut costs by limiting your coverage, but limited coverage could be a disadvantage in itself. 

How does long-term care insurance work? 

If you’re considering purchasing long-term care insurance, it’s crucial to understand how LTC policies work and when you can use them. For instance, most policies will not pay out benefits unless you’re unable to perform at least two out of six activities of daily living (ADLs) on your own. 

Common activities of daily living include:  

  • Getting dressed,
  • Using the toilet independently,
  • Bathing or showering,
  • Getting into and out of bed,
  • Caring for issues of incontinence, and
  • Eating independently

You may also be able to receive LTC benefits if you are diagnosed with dementia or another cognitive impairment, although these issues tend to affect ADLs as well. 

To make a claim, most insurance companies require medical documentation from your doctor outlining your health condition, need for care, and a suggested plan of care. Some LTC companies may even send their own medical professional to perform an evaluation and determine your LTC needs. 

Once a care plan is approved, many LTC companies require that you pay for services out of pocket for a specified period (e.g., 30, 60, or 90 days) before benefits kick in. This is often referred to as an “elimination period.” From there, the insurance company typically pays for services up to a daily limit or until you reach your maximum lifetime payout. 

What are the costs of long-term care insurance? 

According to the American Association for Long-Term Care Insurance, the average cost of LTC coverage for a 55-year-old man in good health was $2,050 in 2019.  For a 55-year-old female in good health, it was $2,700. However, pricing is dependent on the individual’s unique situation and the terms and benefits of the policy.

When should you consider long-term care insurance? 

If you’re considering purchasing long-term care insurance, the best time to do so is when you are in your early 60s. You should be healthy enough for insurers to consider you a reasonable risk at that age. The younger and healthier you are when buying your policy, the lower the premiums. 

We can help with your planning

Long-term care should be considered when planning for your estate regardless of your age. This article is meant to provide an overview of long-term care and insurance and is not a substitute for speaking with one of our expert advisors. If you would like to discuss your unique situation and whether long-term care insurance should be part of your financial planning, please contact our office.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

The Legacy Binder: What it is and why you need one

All too often, individuals pass away without leaving critical information such as financial accounts, legal documents, policies, and passwords. Learn how to create and what to include in a Legacy Binder for your loved ones.

< back to insights gallery

The Legacy Binder: What it is and why you need one

Article | November 11, 2022 | Authored by KDP LLP

Individuals often pass away without leaving loved ones with critical information such as financial accounts, legal documents, policies, and passwords. In the past, family members could typically locate important documents and information by checking a person’s desk or file cabinet. However, in today’s digital world, things aren’t so simple. 

Most of us have a variety of accounts, both online and offline. If something happens to you, your loved ones will need to know how and where to access those accounts. This is where a Legacy Binder comes in handy. 

A Legacy Binder is a collection of documents and information that can be used in the event of your death or incapacity. With a Legacy Binder, your family, agent, or fiduciary will have immediate access to your critical information in one place. 

What should a Legacy Binder include? 

There’s no one-size-fits-all approach to creating a Legacy Binder. The contents will vary depending on your situation and what you feel is important for others to know. However, there are some general categories of information that you may want to include: 

  • Passwords
  • Financial information
  • Household information
  • Digital assets
  • Legal documents
  • List of personal effects
  • Important contacts
  • Final arrangements

Passwords

If you use an online password manager, you probably have a master password to access your account. Additionally, it may require multi-factor authentication in addition to your login credentials. It will be critical to include the login credentials to your password manager or provide instructions on how to find the credentials in your Legacy Binder.

In addition to your password manager, you may want to include instructions on accessing your computer and mobile phone. Those may require login information not commonly stored in the password manager. 

Financial Information

A list of financial accounts and documents should be included in your Legacy Binder. Loves ones will need to pay bills, potentially cancel accounts and manage your estate. Common financial information includes: 

  • A detailed list of assets and debts
  • Real estate deeds
  • Automobile titles
  • Mortgages, auto loans, a home equity loan, and any other debt instruments
  • Lease agreements
  • Bank account information 
  • Online payment accounts (e.g., PayPal, Venmo, etc.)
  • Investment account information
  • Cryptocurrency accounts
  • Employment benefits
  • Retirement accounts cush as a pension, IRA, or 401(k) information 
  • Credit card account details, including points programs
  • Frequent flyer and other travel accounts 
  • Most recent tax returns
  • Insurance Policies (Health, Life, Home, Umbrella, etc.)
  • Business ownership information, including subscription, operating agreements, and any other related agreements

Household Information

Whether you own or rent, your loved ones will need information about how you manage your household. Consider any household services or subscriptions your family will need to know to manage your home in your absence. Common household information to include: 

  • Account information for utilities (e.g., electricity, water, sewer, trash, gas, cable, etc.)
  • Homeowner’s Association membership information and dues
  • Household contracts (e.g., lawn care service)
  • List of important contacts (e.g., household service providers)

Digital Assets 

Digital assets have become an ever more important part of our lives. Include information on the following:

  • Your photos and videos 
  • Domains, blogs, and websites you own
  • Your social media accounts
  • Document storage (e.g., Google Drive, OneDrive, local hard drive, etc.)
  • Online subscription services

Legal Documents

Even if you keep original copies of legal documents in a safe or safety deposit box, include copies of these documents in your Legacy Binder. Common legal documents include: 

  • Birth certificate
  • Marriage certificate
  • Passport
  • Divorce decree/settlement agreement
  • Your Will 
  • Trust documents
  • Living Will & Advance Directives
  • Power of Attorney documents
  • Social security card

List of Personal Effects

While your Will and Trust may cover the disposition of large, valuable items and the bulk of your estate, you likely have smaller items of sentimental value. Often, people would like specific heirs to receive these types of things, such as jewelry or artwork. You may even specify items to sell to pay debts, while other items you’d rather keep in your family. If this is the case, it could be helpful to create a list of these items along with instructions describing what you would like done with them. 

Once you create this list, it’s wise to consult with an attorney to determine the best way to memorialize your wishes. They can help you find a way to add your wishes to a Will or Trust, so they are legally binding. 

Important Contacts

First, provide the contact information for any professionals you use, such as your lawyer, accountant, banker, investment manager, and insurance agent.

Second, list any contacts whom you would like notified in the event of your death. Include names, phone numbers, and email addresses.

Final Arrangements

Your loved ones must be able to locate your burial instructions or final arrangements quickly. If you have prepurchased funeral services, purchased a cemetery lot, or have identified a cemetery, provide those details. If you desire to be cremated, provide instructions on how you want your ashes distributed.   

How to make a Legacy Binder

Making a Legacy Binder is a relatively simple process. Start by gathering all of the essential documents you want to include. Once you have everything, it’s best to keep both physical and electronic copies. We suggest storing a physical copy in a fireproof safe if available. For electronic documents, it is easiest to store these with a secure cloud storage provider or an online vendor that specializes in online Legacy Binders.  

Once you’ve created a Legacy Binder, it’s essential to maintain it. Make sure to add any new documents and remove outdated ones. You should also update your contact information and financial information regularly. 

Finally, make sure your loved ones know where to find your Legacy Binder. Tell them where it’s stored and how to access any electronic copies. 

Conclusion

Legacy binders may seem like quite a bit of work, but they don’t have to be. By following the tips in this article, you can create a Legacy Binder that will be a valuable asset to your loved ones. 

While this article covers the more common items individuals should include in their Legacy Binder, it is not all-encompassing. You may need to include other things based on your unique situation.  

If you need help with your estate planning or identifying what documents you should retain in a Legacy Binder, please contact our office. 

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

Preparing your business for an exit

Selling your business is a significant undertaking that requires foresight, thoughtful planning, and an honest look at you and your business. If done correctly, it is an exciting time that results in the funds and freedom to begin a new adventure in life. Learn about steps you can take to prepare for the sale of your business.

< back to insights gallery

Preparing your business for an exit

Article | November 11, 2022 | Authored by KDP LLP

You’ve built it from the ground up and spent years perfecting your product, but now you’re thinking about selling your business. It’s is a significant undertaking that requires foresight, thoughtful planning, and an honest look at you and your business. If done correctly, it is one of the most exciting times for a business owner that results in the funds and freedom to begin a new adventure in life.  

Below are considerations for any business owner thinking about selling their business. 

Are you ready to leave? 

“Are you ready to leave?” is the first question to ask when thinking about exiting your company, and it’s both financial and personal.

Financially, a significant amount of your income and wealth is likely tied to your business. Will the sale of your company provide the funds necessary for your next adventure or retirement? Has your business reached maturity, or is it still growing and may be worth more in the future? Before selling an income-generating asset, it’s important to project what you may receive for the business versus what you will personally need in the future.

From a personal standpoint, decoupling yourself from your business can be a significant change in your life. Owners immersed in their business may have trouble letting go of the control and responsibility. They may not know what to do with the extra time. And a significant part of their identity may be tied to their position in the business.

Plan in advance

It is ideal for business owners who are ready to sell to start planning 3-5 years in advance. It may sound like a long time, but it will fly for a business preparing to sell. That timetable will enable you to take measures to increase your company’s value, make the operations less dependent on your efforts, find the best options for exiting your business and plan for taxes. 

Not doing any one of these – or not doing them to the fullest extent possible – will result in an even longer timetable, a lower valuation, and increased personal and professional stress for the entirety of the transaction.

Get your financials and documents in order

It’s nearly impossible to value a business or identify opportunities for improvement without accurate financials. You should update all accounting statements, including the income statement, cash flow statement, and balance sheet. Additionally, all asset and liability accounts should be analyzed to ensure accuracy and be adjusted if necessary. 

All accounting records should be GAAP compliant and adhere to updated guidance. For example, accounting records should reflect updated revenue recognition (ASC 606) and lease accounting guidance (ASC 842). A professional audit or review of financials may be warranted to ensure the accuracy of historical financials.     

Sales forecasts and financial projections should also be updated. Projections can be a powerful tool for making well-informed decisions and showing a suitor the business’s future potential.  

All corporate documents such as the articles of incorporation, the operating agreement, by-laws, shareholder agreements, vendor, customer and employee agreements, and tax returns should be gathered, organized, and centralized. These items should be organized and accessible, even if you’re not selling the business.

Getting your financials and documents in order will help you assess the current state of your business and be ready to engage with a suitor. Having everything in order not only speeds the process but will help build a suitor’s confidence in buying the business.  

Discuss valuation and strategies with your CPA

Estimating the value of your company is an important first step. It helps to set your initial expectations, enables you to identify opportunities to increase value, and finally, helps you project the net proceeds from the transaction.  

Companies in your industry may be valued based on revenue and income metrics such as monthly recurring revenue, historical revenue, historical EBITDA, and or future projections. Other metrics such as the number of customers, average customer lifetime value, gross margin, customer acquisition costs, and customer attrition may affect valuation. 

You can identify which metrics are important and find industry comparables by researching industry reports. Investment firms, M&A firms, and business brokers often publish research that includes metrics on completed transactions. This research can also provide valuable information on industry trends, recent news, and active buyers in the market.

While industry reports help provide valuable information, they are not a replacement for discussing the valuation of your unique business with an expert advisor. An advisor can provide guidance and perform expert analysis of your business.  

You may benefit from a professional valuation to better understand what your business may be worth to a potential buyer. There are many reasons why a company might be interested in buying your business, and thus, your business may be worth more or less to different buyers. An expert advisor can help identify the strategic and synergistic value a business may provide to different buyers and adjust the valuation accordingly. This can help you focus on potential buyers who might be willing to pay the most for your business.  

Our firm can perform other analyses to help you identify potential gaps or problems and maximize value. For example, a Quality of Earnings report can provide a detailed analysis of your company’s revenue and expenses. It can help both the buyer and seller understand the forward-looking performance of the business at a very detailed level. While you can use this report to identify and address problems or gaps, you can also use it to help support your valuation and transaction terms.  

Maximize your company’s value

Business owners should create a plan for increasing value, and that plan may include short-term and long-term tactics, all depending on the time horizon. Trimming unnecessary expenses, cutting unprofitable customers or low-margin products, investing in sales, and investing in management are all ways to drive value.

Businesses that are dependent on an owner are not as valuable as businesses that aren’t. A suitor may decrease an offer, hold back sale proceeds or require that an owner remains with the company post-sale for a certain amount of time. Ideally, the owner should take steps to decouple themselves from operations.

Management should document all critical business processes and the resources needed for each. Employees should be cross-trained so that no process is dependent on just one employee. Management should also look for and address any single points of failure in all operations and infrastructure. These steps will decrease the risk for a buyer, ensure a smooth transition and thus, increase the amount they are willing to pay.  

Plan for taxes ahead of time

Tax planning should not be an afterthought of your sale process. It should be one of the first things you consider. In the beginning, an owner has a significant amount of flexibility in the type and terms of the transaction, but the options narrow as the process moves forward.  

Tax optimization strategies go beyond just the business because they must consider both the company and the owner(s). Depending on the situation, there may be steps you should take from an estate planning perspective well before starting the sale process. 

The type and structure of the transaction may play a significant role in the timing and amount of income an owner realizes. 

Contact our office

Each situation is unique, which is why owners should work closely with their advisors. They can help maximize both the business’s value and the net proceeds from the transaction. If you are thinking about selling your business, please contact our office to discuss your situation. Our expert advisors can help provide the guidance needed to maximize the value of your business, minimize your tax consequences and maximize your wealth.  

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

IRS proposes regulations to the basic exclusion amount for estate and gift tax

Many wealthy individuals have taken steps to maximize their lifetime gift tax exemption before it reverts back to a lower level in 2026. However, the IRS recently proposed new guidance that would allow for clawbacks of certain gifted assets. Learn more about the proposed changes in this article.

< back to insights gallery

IRS proposes regulations to the basic exclusion amount for estate and gift tax

Article | November 11, 2022 | Authored by KDP LLP

Many wealthy individuals have taken steps to maximize their lifetime gift tax exemption to minimize estate taxes when they pass away. Even though the current lifetime gift tax exemption is set to revert to a lower level in 2026, the IRS stated in 2019 that it would not claw back completed gifts. However, in a new twist, the IRS recently proposed new guidance that would allow for clawbacks in certain situations. We’ll provide a background and an overview of the proposed changes in this article.        

Background

The Tax Cuts and Jobs Act made several changes to the tax code, including an increase in the basic exclusion amount (BEA), also known as the lifetime gift tax exemption, for estate and gift taxes. The new exclusion amount was set at $10 million adjusted for inflation for tax years 2018 through 2025, after which it will revert to $5 million (estimated to be $6.8 million for the tax year 2026). 

Unfortunately, this change created a problem. What if an individual maximizes the basic exclusion in 2025 but dies in 2026? The IRS created a special rule in 2019 known as the anti-clawback rule to address this issue. Essentially, the rule sought to prevent an estate from facing taxation if they use their BEA, but then the BEA drops to a lower level in the future.  

However, the anti-clawback rule did not distinguish between completed and deferred gifts. A completed gift occurs when the donor makes a gift during their lifetime and does not retain use and control of the asset. A deferred gift occurs when the donor makes a gift during their lifetime but retains use and control of the asset. For example, if a donor gifts real estate to a child but retains a life estate (enabling them to live in and use it while they’re still alive), this could be considered a deferred gift. 

The problem is that individuals have been using deferred gifts to maximize their BEA ahead of the planned reduction, and the IRS and Treasury don’t consider a deferred gift to be a completed lifetime gift. In response, the Treasury Department issued proposed regulations addressing situations where an estate could be taxed at the reduced BEA for deferred gifts made before the reduction in the BEA.  

Proposed regulations

The proposed regulations address situations in which gifts made during a donor’s lifetime, while the BEA was increased, could potentially be subject to the reduced BEA at the time of a donor’s passing in 2026 or later, thus limiting the anti-clawback rule. The regulations stipulate that a donor’s lifetime gifts might be subject to estate taxes, even if the gifts were free of tax when made before 2026. Specifically, if a donor makes a deferred gift wherein they retain a beneficial interest in the gifted asset, the Treasury Department’s new proposed regulation will consider such a gift a “deferred gift,” and one that can be subject to estate taxes under the reduced BEA. 

This exception to the anti-clawback rule clarifies which gifts might be considered deferred gifts, or testamentary transfers, for estate tax purposes and thus subject to the reduced BEA in effect at the time of death. It’s important to note that this only causes taxation if the deferred gifts cause an estate to be valued higher than the BEA at the time of the donor’s death, and only the asset value over the BEA would be taxable.

While the Treasury Department’s guidance does not provide an exhaustive list of deferred gifts, it does provide examples of certain types of deferred gifts that would be exempted from the anti-clawback rule, including:

  • Gifts of assets wherein the donor retains a lifetime interest,
  • A remainder interest in grantor-retained annuity trusts (GRAT), and
  • Enforceable promissory notes

Assets in which the donor retains a lifetime interest

A lifetime interest is a type of ownership interest in an asset that lasts for the duration of an individual’s life. For example, a donor gifts a parcel of real estate to their son, but retains the right to live on the property for the rest of their life. In this case, the donor’s son may be the legal owner of the property, but the donor still has a beneficial interest (the right to use and live in) in the real estate for the duration of their life. 

Because the donor retains a beneficial interest in their gift for their lifetime, the gift will be considered a deferred gift. Also, since the son only obtains exclusive use of the asset upon the donor’s death, the asset will be considered a testamentary transfer. As a result, the asset will be part of the donor’s gross estate, and any value over the BEA at the time of death would potentially be subject to federal and state estate taxes. 

Grantor-retained annuity trusts

A GRAT is a type of trust where the trust’s creator (the grantor) retains a right to receive annuity payments from assets placed in the trust, even though a separate trustee holds the assets. For example, let’s say John Doe creates a GRAT with a lifetime interest in annuity payments under the trust. He transfers 1,000 shares of a startup into the trust and retains the right to receive annuity payments from distributions made by the startup each year. In such a case, the trust legally owns the original shares, but John retains a beneficial interest in distributions from the startup. Because John retains a beneficial interest in the distributions under the trust, the asset could be subject to clawback if John passes while still having rights to the startup’s distributions.

Enforceable promissory notes

A promissory note is a legal instrument that documents a loan between two parties. The first party, known as the grantor, agrees to lend the second party, known as the grantee, a sum of money in exchange for payments with interest over a specified period. 

In some cases, the grantor may retain a lifetime interest in a promissory note. For example, let’s say John Doe gifts a promissory note payable by him to his trust (an enforceable promise gift) while the BEA is high but dies in 2026 when the BEA reverts to $6.8 million. On John’s death, the assets used to satisfy any unpaid portion of the note payable to John’s trust are part of John’s gross estate and thus subject to the reduced BEA.  Effectively the outstanding liability related to the note is not allowed to reduce the taxable estate at the time of death.

18-month rule

The proposed regulations also create an 18-month rule, whereby completed gifts might be clawed back into a decedent’s estate if they relinquished control of the gift less than 18 months before their passing. 

For example, let’s say John Doe owns shares of a startup worth $9 million. He gifts the shares to his son in June 2025, during the increased BEA, then passes away in June 2026. Under the proposed regulations, the transfer of the shares to John’s son would be considered a testamentary transfer. This means the value of the shares will be included in John’s gross estate and subject to the reduced BEA in 2026. 

However, the proposed regulations will not apply to the termination of a retained interest within the 18-month window before the donor’s death if the termination was pursuant to the original transfer instrument. 

For example, John Doe creates a GRAT in 2022. According to the GRAT’s terms at the time of creation, John Doe will lose his retained interest in the GRAT in June 2025. At that time, John Doe’s son will be given all interest in the GRAT. John Doe subsequently passes in June 2026, within the 18-month period when completed gifts can be clawed back into his estate. Yet, John Doe did not choose to make the gift in June 2025 contemporaneously, instead, the transfer was pursuant to the original transfer instrument. As a result, the value of the GRAT will not be clawed back into John’s estate for estate tax purposes even though he passed within the 18-month window after its transfer. 

What are the implications?

The proposed rule could lead to deferred gifts being clawed back into the donor’s estate, even if the gifts are made before the reduction in the BEA. Further, if the deferred gifts appreciated in value between the time the gift was made and the time of the donor’s death, it could add even more to the donor’s gross estate. 

It also means many individuals will need to make gifts before the reduction of the BEA in 2026. And, they need to be wary of how those gifts are made. If they retain an interest in the gifted property, it could potentially be clawed back into their estate. This may lead to a reduction in gifts and instruments where the donor retains an interest, such as life estates.

Finally, because of the 18-month rule’s exception of certain transfers, many note instruments will need to be in effect before the 18 months and contain a completed transfer date of December 2025 (or earlier) to prevent clawback. This may lead to a massive shift in wealth from one generation to the next before 2026. 

How to lock in a gift exemption

First, individuals who may be affected by the change in BEA (those with estates valued at $6.8 million or more) will need to take advantage of the increased BEA by making completed gifts before 2026. Donors may also need to be mindful of the 18-month rule, which could claw back gifts made within 18 months of their passing. 

Secondly, donors need to be wary of gifts that retain a lifetime interest – because such gifts could be subject to clawback even if made before 2026. For individuals that want to take advantage of the increased BEA and make gifts wherein they retain an interest, the transfer document (such as a GRAT or promissory note) may need to include a well-defined transfer date prior to January 1, 2026. 

Contact our office for more information

This article is intended to provide a brief overview of the IRS’s new proposed regulations and is not a substitute for speaking with one of our expert advisors. If you would like to learn more about these proposed regulations and how they might affect your estate, please contact our office. 

The information provided in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

What you need to know about state inheritance & estate taxes

Many people are aware of the federal estate tax, but few realize that certain states also levy estate and inheritance taxes on the assets one leaves behind. Learn about which states impose taxes, what the tax rates are, and how they may affect your estate planning. 

< back to insights gallery

What you need to know about state inheritance & estate taxes

Article | November 11, 2022 | Authored by KDP LLP

Many people are aware of the federal estate tax, but few realize that certain states also levy estate and inheritance taxes on the assets one leaves behind. These taxes can be significant, so it’s important to understand which states impose taxes, what the tax rates are, and if they affect your estate planning. 

What is the difference between estate and inheritance taxes? 

Estate taxes are imposed on the net value of an individual’s estate upon their death. Typically, estate taxes are calculated based on the total estate value of the estate that exceeds an exemption amount, if any. Many states have graduated tax rates that increase as the value of an estate increases.  

Inheritance taxes are imposed on someone who inherits money, property, or other assets. Like estate taxes, inheritance taxes are calculated based on the amount a beneficiary receives that exceeds an exemption amount, if any. The tax rates vary by state and often by the relationship between the heir and the deceased. For example, in Iowa, the inheritance tax rates for a brother, sister, son-in-law, and daughter-in-law are less than for an uncle, aunt, niece, nephew, foster child, cousin, brother-in-law, sister-in-law, or any other individual.

Estate taxes are typically paid out of one’s estate before assets are distributed to a person’s heirs, while inheritance taxes are paid by one’s heirs after they inherit assets. Generally speaking, though, both forms of taxation reduce the amount of wealth one leaves behind for their loved ones. 

When determining whether state estate or inheritance taxes are owed, it’s important to review the laws of the state where the deceased lived (for estate taxes), and the laws of the state where heirs live or where inherited property is located (for inheritance taxes). 

Which states have an estate or inheritance tax? 

Not all states have estate or inheritance taxes. Moreover, some states only have estate taxes, while others only have an inheritance tax. Maryland is the only state that has both estate and inheritance taxes. 

Many states that impose an estate or inheritance taxes also provide an exemption amount. The exemption is the amount of an estate or inheritance that is not subject to taxes. Anything above the exemption is taxable. 

In general, spouses are exempt from state estate and inheritance taxes.

The table below shows which states have inheritance and estate taxes. Additionally, each state name in the table links to more information about its estate and inheritance taxes.  

State

Inheritance Tax

Estate Tax

Connecticut

 

Up to 12%

Hawaii

 

Up to 20%

Illinois

 

Up to 16%

Iowa

Up to 15%

 

Kentucky

Up to 16%

 

Maine

 

Up to 12%

Maryland

10%

Up to 16%

Massachusetts

 

Up to 16%

Minnesota

 

Up to 16%

Nebraska

Up to 18%

 

New Jersey

Up to 16%

 

New York

 

Up to 16%

Oregon

 

Up to 16%

Pennsylvania

Up to 15%

 

Rhode Island

 

Up to 16%

Vermont

 

16%

Washington

 

Up to 20%

Washington, D.C.

 

Up to 16%

Minimizing estate and inheritance taxes 

There are many different strategies to reduce if not eliminate state inheritance and estate taxes. One strategy is to move to a state that has no estate or inheritance taxes. Another is to take advantage of the annual gift tax exclusion which enables an individual to gift up to $16,000 per recipient per year tax-free. Couples are allowed to gift up to $32,000 per recipient per year tax-free. There are also strategies that involve the use of trusts to help minimize estate and inheritance taxes. 

State inheritance and estate taxes can be quite complex (and costly). We suggest discussing how to reduce or eliminate inheritance and estate taxes for your unique situation with one of our expert advisors. Please contact our office with any questions or to discuss. We would be happy to help create a plan to preserve wealth for your loved ones.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

How Health Savings Accounts Work

Many financial experts tout the benefits of a Health Savings Account, or HSA, but many people are not familiar with how they work. In this article, we will provide an overview of HSAs, including how to use them, how they work, and why you might want one.

< back to insights gallery

How Health Savings Accounts Work

Article | November 11, 2022 | Authored by KDP LLP

Financial experts tout the benefits of a Health Savings Account, or HSA, but many people are not familiar with how they work. HSAs offer unique benefits that you won’t find with standard health insurance policies or other savings accounts. An HSA helps to minimize healthcare spending, minimize taxes and potentially grow savings through investments. This article will provide an overview of HSAs, including how they work and why you might want one.

What is an HSA?

An HSA is a type of savings account that enables individuals or families to set aside funds to pay qualified medical expenses on a pretax basis. An HSA is used in conjunction with a High Deductible Health Plan where the individual or family must pay a certain amount of healthcare expenses on their own before insurance begins paying. An HSA enables an individual to pay for those health care expenses and future expenses with pretax dollars.

HSAs and High Deductible Health Plans were originally created to help curb health care costs. The premise is that individuals will be more conscious of health care spending if they use their own money.

On the surface, an HSA is a savings account, but the funds can only be used for qualified medical expenses. You contribute funds into the account and then use a debit card or check to pay for your qualified medical expenses with those funds. You can also transfer money into your regular checking account to reimburse yourself for qualified medical expenses.

Who is eligible for an HSA?

To be eligible for an HSA, you must meet the following criteria:

  • You must be covered under a High Deductible Health Plan (“HDHP”) for at least the first day of the last month of the tax year.
  • You must not have other health coverage except what is permitted by the IRS under “other health coverage”.
  • You must be under the age of 65.
  • You cannot be claimed as a dependent on someone else’s tax return.

What is a High Deductible Health Plan?

A deductible is the amount of qualified health care expenses you must pay before your health insurance begins paying. A High Deductible Health Plan is a health insurance plan with a higher deductible than a traditional health insurance plan. While participants are required to pay a greater share of healthcare expenses initially, these plans often have lower policy premiums.

Deductibles can vary from plan to plan, but the IRS defines a High Deductible Health Plan as any healthcare plan with a deductible of at least $1,400 for individuals and $2,800 for families. Plans with higher deductibles typically have lower policy premiums.

Insurance will begin paying once a deductible is met, but not necessarily 100% of all future expenses. The insurance company may pay only a percentage of future costs up to an “out-of-pocket” limit. The out-of-pocket limit is the maximum you’re required to pay for deductibles, copayments, and coinsurance. Note that policy premiums are not included in the out-of-pocket limit.

The out-of-pocket limits for high deductible health plans paired with health savings accounts are $7,000 for individuals and $14,000 for families. In 2022, these will increase to $7,050 for individuals and $14,100 for families. Once the out-of-pocket limit is reached, insurance pays for 100% of qualified expenses.

Even though High Deductible Health Plans contain high deductibles and high out-of-pocket limits, the plans offer negotiated rates with most medical providers. For example, if your original bill is $2,000 for a procedure, your HDHP may negotiate the rate down to $1,200, even if you haven’t met your deductible. In this example, you would only be responsible for the negotiated price.

HDHPs and HSAs

So, where do HSAs come in? As you may imagine, it’s difficult to pay for your healthcare out-of-pocket. An HSA helps relieve some of the financial strain by enabling you to pay for your out-of-pocket costs pretax. You contribute to an HSA account with money that isn’t taxed, then pay for your portion of medical expenses with those funds.

What are the benefits of an HSA?

There are many benefits for people who use an HSA.

First, your HSA contributions are tax-deductible on your federal tax return if you make the contributions directly. If your employer makes the contributions via automatic payroll deductions, they are made pretax and deducted from your payroll check.

You can invest your HSA funds in a variety of securities, from mutual funds to stocks and exchange-traded funds. These investments grow tax-free, and all withdrawals for qualified medical expenses are tax-free.

The funds in your HSA rollover. If you don’t use all the funds in one year, you can use them later or let the funds in your HSA grow as an investment. You can also keep using your HSA if you change jobs or insurance carriers. It’s your account as long as you meet the qualifications.

How much can you contribute to an HSA?

For 2021, an individual may contribute up to $3,600 for an individual or $7,200 for a family. For 2022, an individual may contribute up to $3,650 for an individual or $7,300 for a family. Those who are 55 or older can make catch-up contributions of $1,000 per year in addition to their regular contributions. Your employer can contribute to your HSA, but the total contributions must still be within the above limits.

How do you start an HSA?

Starting an HSA is pretty simple. You go through the same basic steps as setting up any other insurance plan and investment account. First, enroll in an HDHP. You can contact your employer to see if they offer one or enroll in one yourself. If you’re self-employed, check with your health insurance provider, insurance broker, or agent. Once you enroll in an HDHP, ask your employer if they offer an HSA option. If so, they can set up your account and deposit money into the account on your behalf via automatic payroll deductions. If your employer doesn’t offer an HSA, look for a bank or financial institution that provides these types of accounts. Most larger financial institutions have an HSA option.

What if you need to make a non-qualified withdrawal?

If you withdraw funds from your HSA for something other than a qualified medical expense, it’s considered a non-qualified withdrawal. There are penalties and taxes for this type of withdrawal, depending on your age. If an individual withdraws funds from an HSA for non-qualified expenses and is under the age of 65, then the withdrawn amount will be subject to income taxes and a 20% penalty. However, if an individual is over the age of 65, then the withdrawn amount will only be subject to income taxes. There are no penalties.

Is an HSA right for you?

An HSA can be an excellent investment for certain people. If you are generally healthy and have minimal medical expenses, an HDHP and HSA can help you save money on healthcare and increase your investment options. However, if you have several health conditions and regularly need expensive care, you may have trouble funding your HSA and paying your deductibles. In this case, an HDHP and HSA may be more expensive than your current insurance plan. Whatever your situation, we suggest performing the calculations to project your healthcare requirements and cash outlays for each plan available to you.

The purpose of this article is to provide an overview of health savings accounts and is not meant to replace discussing your unique situation with an expert. Please contact our office if you would like to discuss if a health savings account is right for you. We’re always happy to help.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.

Tax Credits and Savings for Education

College is a significant investment, whether you’re paying for your own education or a dependent’s. Thankfully, there are tax credits to help defray the costs. Learn about two available tax credits along with other tax savings for education.

< back to insights gallery

Tax Credits and Savings for Education

Article | November 11, 2022 | Authored by KDP LLP

College is a significant investment, whether you’re paying for your own education or a dependent’s. Thankfully, there are tax credits to help defray the costs.

In the United States, there are two specific tax credits for education: The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

Each credit has its own advantages for taxpayers, and there are certain requirements to claim each credit. In this article, we will cover everything you need to know about these two educational tax credits.

What is a tax credit?

First, it’s important to clear up some confusion regarding tax credits and tax deductions. Credits and deductions are two separate things, though they both save you money on taxes.

A tax credit can be used to pay a tax liability. For example, if a taxpayer has a federal tax bill of $5,500 and a tax credit of $2,500, the taxpayer may use the credit to pay $2,500 of the liability. Some tax credits are refundable, meaning that a taxpayer may receive a refund if the tax credit exceeds their tax liability. 

A tax deduction on the other hand is an amount deducted from your taxable income. For example, if a taxpayer earned $100,000 and had a deduction of $10,000, then they would owe taxes on the net of $90,000.

Who can claim a tax credit for education?

Even though each tax credit has its own guidelines and limitations, a taxpayer must meet the following requirements to be eligible for either one:

  1. You, your dependent, or a third party pays qualified education expenses for higher education.
  2. An eligible student must be enrolled at an eligible educational institution.
  3. The eligible student is yourself, your spouse, or a dependent you list on your tax return.

A taxpayer is not eligible for either of the tax credits if:

  1. Someone else, such as your parents, list you as a dependent on their tax return.
  2. Your filing status is married filing separately.
  3. You already claimed or deducted another higher education benefit using the same student or same expenses.
  4. You (or your spouse) were a non-resident alien for any part of the year and did not choose to be treated as a resident alien for tax purposes.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) AOTC is available for the first four years of higher education and provides a maximum of $2,500 per student per year. 

The amount of the credit is 100% of the first $2,000 of qualified education expenses paid for each eligible student and 25% of the next $2,000 of qualified education expenses paid for that student – for a total of $2,500. Qualified expenses include tuition, required enrollment fees, student activity fees, books, and supplies.

To qualify for the American Opportunity Tax Credit (AOTC), the student must:

  • Be pursuing a degree or other recognized education credential,
  • Be enrolled at least half time for at least one academic period beginning in the tax year,
  • Not have finished the first four years of higher education at the beginning of the tax year,
  • Not have claimed the AOTC or the former Hope credit for more than four tax years, and
  • Not have a felony drug conviction at the end of the tax year.

There are income limitations for the AOTC:

  • To claim the full credit, the taxpayer’s modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
  • The taxpayer receives a reduced credit amount if their MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
  • The taxpayer cannot claim the credit if their MAGI is over $90,000 ($180,000 for joint filers).

The full AOTC credit is worth $2,500 per student annually. Taxpayers may use it for the first four years of enrollment at an eligible college or vocational school, and it’s partially refundable. If the credit reduces a taxpayer’s tax liability to $0, then the taxpayer may receive a refund of 40% of the remaining credit amount (up to $1,000). 

Lifetime Learning Credit

Students who aren’t eligible for the AOTC may still qualify for the Lifetime Learning Credit (LLC). The AOTC helps taxpayers claim a tax credit of up to $2,000 per tax return to cover the costs of college and continuing education for themselves, a spouse or dependent children. This credit is often used to help pay for professional degree courses as well as graduate courses, though you may use it for undergraduate courses too. Unlike the AOTC, a taxpayer may claim the LLC for any number of tax years as long as the qualifications are met.

The amount of the credit is 20% of the first $10,000 of qualified education expenses for a maximum of $2,000 per return. Qualified expenses include tuition, fees, books, supplies and equipment.

To qualify for the Lifetime Learning Credit, the taxpayer must:

  • Be enrolled or taking courses at an eligible educational institution.
  • Be taking higher education course or courses to get a degree or other recognized education credential or to get or improve job skills.
  • Be enrolled for at least one academic period beginning in the tax year.

Unlike the American Opportunity Tax Credit, the student doesn’t need to pursue a degree to qualify for the LLC. Also, the Lifetime Learning Credit doesn’t have any requirements regarding felony drug convictions.

However, there are income limitations for the LLC:

  • To claim the full credit for 2021, the taxpayer’s modified adjusted gross income (MAGI) must be $59,000 or less ($118,000 or less for married filing jointly).
  • For 2021, the amount of your LLC is gradually reduced (phased out) if your modified adjusted gross income is between $59,000 and $69,000 ($118,000 and $138,000 for married filing jointly).
  • You can’t claim the credit if your modified adjusted gross income is $69,000 or more ($138,000 or more for married filing jointly).

The LLC provides a maximum credit of $2,000 per tax return no matter how many students qualify for the credit in a single tax year. The credit is not refundable.

Which education tax credit should I use?

The American Opportunity Tax Credit is almost always the better option for undergraduate expenses. It provides the most value dollar-for-dollar, and it’s up to 40 percent refundable. The maximum credit is $2,500 per year.

However, some students don’t qualify for the AOTC. If your situation doesn’t meet the qualifications listed above, take advantage of the LLC. If you qualify for this credit, you may still see significant savings on your tax return.

Are there any other tax savings available for education?

After 2020, there aren’t any deductions for tuition and fees, which are usually the bulk of educational expenses, but there are other tax savings available.

Student Loan Interest Deduction

The student loan interest deduction is a popular tax benefit. It reduces your taxable income according to the interest you paid throughout the year on your student loans. If you paid more than $600 in interest on a student loan, you should receive a 1098-E tax form that displays that amount of student loan interest you can claim on your tax return.

You may deduct up to $2,500 in student loan interest per student, and you don’t need to itemize your deductions to claim it. However, there are other requirements for tax year 2021:

  • You paid interest on a qualified student loan;
  • You’re legally obligated to pay interest on a qualified student loan;
  • Your filing status isn’t married filing separately;
  • Your MAGI is less than $85,000 (or $170,000 if married filing jointly); and
  • Neither you nor your spouse, if filing jointly, can be claimed as dependents on someone else’s return.

You must also use your student loan for qualified education expenses, which include tuition, fees, books, supplies, transportation, and room and board.

Education and Savings Plans

You may also take advantage of an education savings plan. An education savings plan lets the owner open an investment account to save for a beneficiary’s educational expenses. These accounts provide tax benefits, though they aren’t federally tax-deductible. Instead, your earnings grow tax-free, and you won’t owe taxes when you use the funds to pay for the beneficiary’s qualified education expenses.

There are three options available through state or federal plans:

The qualifications and guidelines vary for each plan, so you’ll need to do a bit of research to find the best option for your situation.

Scholarships and Fellowships

If you qualify for a scholarship or fellowship, you may not owe taxes on the amount you receive. However, some scholarships and fellowships are considered taxable income, so check with a CPA for guidance. Usually, these resources are only tax-free if you are a candidate for a degree at an eligible educational institution and you use the scholarship or fellowship to pay qualified education expenses.

Final Thoughts

Educational expenses can quickly add up, especially when you’re paying for undergraduate or post-graduate programs. With a little planning, you can take advantage of these tax credits and savings to reduce your expenses. While this article provides an overview of tax credits and savings, it is not a substitute for speaking with one of our expert advisors.  If you would like to discuss tax credits and savings for education, please contact our office.

Let’s Talk!

Call us at (541) 773-6633 (Oregon), (208) 313-7890 (Idaho) or fill out the form below and we’ll contact you to discuss your specific situation.





  • Topic Name:
  • Should be Empty:

KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

Oregon Office:
(541) 773-6633

Idaho Office:
(208) 373-7890.