For over 37 years, Michael D. Peroo, CPA, and his firm, Michael D. Peroo, CPA, PA, have specialized in providing comprehensive financial services to Rural Water Districts across Kansas and beyond. With an in-depth understanding of the unique challenges these districts face, we offer a wide range of services tailored to enhance your district’s financial health and operational efficiency.

Our Expertise: More Than Just Numbers

Our team doesn’t just deliver reports filled with numbers. We provide actionable insights that empower your board to make informed decisions. Here are the key services we offer:

• Auditing: Thorough, independent audits that ensure compliance, transparency, and accuracy in your financial statements.
• Accounting and Payroll Services: Streamlined accounting and payroll management to keep your district’s finances organized and compliant.
• Water Rate Studies: In-depth analysis of current water rates to ensure they are fair, adequate, and sustainable for both the district and its members.
• Financial Assessment of the District: Evaluation of the district’s financial health, identifying strengths, weaknesses, and areas for improvement.
• Cash Flow Management: Strategies to optimize cash flow, ensuring sufficient liquidity for daily operations and future investments.
• Capital Improvement Plans: Development of strategic plans for maintaining and upgrading infrastructure, ensuring long-term sustainability.

Going Beyond the Basics – Providing Valuable Insights After Every Audit

After every audit, Michael D. Peroo, CPA goes a step further by providing the board with a comprehensive financial analysis of the district. This analysis includes:

• Financial Trends: Understand how your district’s financial health is evolving over time.
• Key Financial Metrics: Critical data points that reflect your district's performance, enabling informed decision-making.
• Water Rate Adequacy: Evaluation to ensure that current water rates are sufficient to cover operational and capital costs.
• Cash Adequacy: Assessments to confirm that your district has enough cash reserves to meet short-term and long-term obligations.
• Accounts Receivable Turnover: Analysis of how efficiently your district collects revenue, identifying opportunities for improvement.

Why Choose Michael D. Peroo, CPA?

• Proven Expertise: We have over 37 years of experience serving more than 20 Rural Water Districts.
• Personalized Service: We provide tailored insights that go beyond the numbers, empowering your board to make strategic decisions.
• Competitive Fees: Our audit fees are highly competitive, ranging from $3,500 to $4,500 depending on the number of benefit units and the amount of outstanding debt.

See the Difference for Yourself!

If you're tired of receiving the same old reports year after year and are looking for a partner who provides real value, consider giving us a look. We’d be happy to attend a board meeting and demonstrate our presentation style and how it could benefit your district.

We've also authored a book to help Rural Water Districts like yours navigate the complex financial landscape. This resource, combined with our practical services, offers an unparalleled level of support for your district.

Let’s Work Together to Strengthen Your District!

Interested in learning more? Contact us today to schedule a presentation or to discuss how we can help your Rural Water District thrive. Let’s make sure your district is financially sound, competitive, and prepared for the future!

Last week, a bipartisan group of lawmakers introduced the Health Out-of-Pocket Expense (HOPE) Act (H.R. 9394), a bill aiming to create a new tax-advantaged savings account for medical expenses. This new account would be available to anyone with qualifying health coverage and provide a unique way to save for future health costs.

Key Features of the HOPE Account

Contribution Limits and Eligibility:

• The HOPE Act allows individuals to contribute up to $4,000 annually ($8,000 for families). Qualifying health coverage includes minimum essential coverage, such as plans offered on the commercial market, Medicare, Medicaid, or Indian Health Service.
• Employers may also contribute to these accounts, up to 50% of the annual limit. Employer contributions would be excluded from the employee's adjusted gross income if their income is $100,000 or less ($200,000 for married couples filing jointly).

 

Tax Treatment of HOPE Accounts:

• Individual contributions to HOPE accounts are not deductible; however, distributions used to pay for qualified medical expenses are excluded from the beneficiary's gross income. This makes the HOPE account similar to a Roth savings account, which allows for non-deductible contributions and tax-free distributions for qualified purposes.

 

Interaction with Other Health Accounts:

• Contributions to other tax-advantaged health accounts like Health FSAs, HSAs, certain HRAs, and Archer MSAs reduce the amount that can be contributed to a HOPE account in the same year.

 

How HOPE Accounts Differ from Existing Options

 

Health FSAs (Flexible Spending Arrangements):

• Health FSAs allow for contributions by employees and employers. For 2024, the maximum employee contribution is $3,200. Contributions are tax-free, but unused funds are generally forfeited at the end of the year unless an exception applies.

HSAs (Health Savings Accounts):

• HSAs are available only to those enrolled in high-deductible health plans. For 2024, the annual contribution limit is $4,150 for self-only coverage and $8,300 for family coverage. Contributions are tax-free, portable, and remain in the account until used.

HRAs (Health Reimbursement Arrangements):

• HRAs are funded solely by employers to reimburse employees for medical expenses. They are tax-free, and balances can carry over to future periods but do not move with an employee who changes jobs. The maximum benefit amount for 2024 is $2,100.

Archer MSAs (Medical Savings Accounts):

• Archer MSAs were discontinued in 2007, but they remain available to active participants. Contributions are generally deductible, and distributions for medical expenses are not taxable.

 

The Need for HOPE Accounts

The introduction of HOPE accounts has raised questions about their necessity given the existing options. Representative Jimmy Panetta (D-CA) argues that HOPE accounts would "incentivize Americans to save for future medical expenses not covered by their insurance." Representative Adrian Smith (R-NE) added that these accounts would provide families with "a new tool to protect themselves and their household finances from a surprise illness or injury."

Conclusion

The HOPE Act aims to provide another means for Americans to save for health care expenses, offering flexibility like a Roth savings account. It remains to be seen how this proposed savings option will fit alongside existing accounts like FSAs, HSAs, and HRAs, and whether it will gain the support needed to become law.

 

Kamala Harris’s tax plan largely mirrors the broader Biden-Harris administration's approach, emphasizing increased taxes on corporations and high-income individuals. The plan aims to generate revenue to fund various social and economic programs. However, a recent economic analysis by the Tax Foundation, suggests that the proposed tax changes could have significant effects on the U.S. economy.

Key Provisions of the Harris Tax Plan

1. Increase in Individual Tax Rates:

The plan proposes raising the top marginal tax rate on individual incomes to 39.6% for single filers earning over $400,000 and married couples filing jointly earning over $450,000. This move would align with the pre-2017 tax reform levels.

2. Tax on Capital Gains and Unrealized Gains at Death:

One of the most notable provisions is the proposed increase in the capital gains tax rate to 28% for individuals earning over $1 million. Additionally, the plan introduces a tax on unrealized capital gains at death for estates valued over $5 million, effectively reducing the "step-up" in basis for inherited assets.

3. Limiting Like-Kind Exchanges (1031 Exchanges):

The plan seeks to limit the tax-deferral benefit of like-kind exchanges to $500,000 in gains, which may discourage real estate investors who rely on this provision to reinvest proceeds without immediate tax consequences.

4. Corporate Tax Increases:

The corporate tax rate would increase from 21% to 28%, reversing part of the reduction implemented in 2017. Additionally, the corporate book minimum tax rate would be raised from 15% to 21%, and the excise tax on stock buybacks would increase from 1% to 4%.

5. Expansion of the Net Investment Income Tax (NIIT):

The plan proposes expanding the NIIT base to include active pass-through business income and raising the NIIT rate from 3.8% to 5%. Additionally, it raises the additional Medicare tax from 0.9% to 2.1%.

6. Other Provisions:

Other significant measures include taxing carried interest as ordinary income, tightening estate tax rules, imposing new limits on large retirement account balances, and making the American Rescue Plan Act's Earned Income Tax Credit (EITC) expansion permanent.

Economic Impact: The Tax Foundation's Analysis

The Tax Foundation’s economic model provides a comprehensive assessment of the proposed tax changes' potential effects on the economy:

• Gross Domestic Product (GDP):

The overall economic output is projected to decrease by 2.0%. This decline is mainly driven by reduced capital formation due to higher taxes on corporate profits, capital gains, and estates.

• Gross National Product (GNP):

The GNP, which measures the value of goods and services produced by U.S. residents, is expected to fall by 1.8%. This reflects the reduced income accruing to U.S. residents as capital investment is discouraged.

• Capital Stock and Wages:

The analysis indicates a 3.0% reduction in capital stock, reflecting a lower incentive for investment. Wages are projected to decline by 1.2%, primarily due to decreased productivity and capital accumulation.

• Full-Time Equivalent Jobs:

The proposed tax changes are estimated to result in a loss of approximately 786,000 full-time equivalent jobs. The most significant job losses are attributed to the higher corporate tax rate, expanded NIIT, and increased taxes on capital gains and estates.

• Additional National Debt:

While the tax plan aims to increase federal revenue, the potential reduction in economic growth could offset some gains, potentially adding to the national debt if economic output shrinks and reduces the tax base.

Specific Provisions and Their Projected Impacts

1. Raising Individual Tax Rates:

Estimated to reduce GDP by 0.1% and result in a loss of 86,000 jobs.

2. Taxing Unrealized Capital Gains at Death:

Expected to reduce GDP by 0.2%, GNP by 0.4%, and cause a loss of 75,000 jobs.

3. Limiting 1031 Like-Kind Exchanges:

Minimal impact on GDP, but a loss of 2,000 jobs.

4. Expanding and Increasing NIIT:

Predicted to reduce GDP by 0.2% and result in 41,000 fewer jobs.

5. Raising Corporate Taxes:

The most significant impact, with a projected 0.6% decline in GDP and a loss of 125,000 jobs.

Conclusion

While Kamala Harris's tax plan aims to generate additional revenue to fund social programs and reduce inequality, the economic analysis suggests potential trade-offs, including slower economic growth, reduced capital investment, and significant job losses. As Harris’s plan is more big government, more taxes, and more spending it will harm our National Debt which will increase interest costs, and job losses due to negative economic growth.  We need a plan that stays within the limits of our constitution.  We need less government and more entrepreneurship; we need working people to keep their hard-earned money instead of turning it over to the federal government for more unconstitutional spending.

 

If you sell your primary residence (the home you live in most of the time), you may be eligible to exclude up to $250,000 of capital gains from your income if you are a single filer, or $500,000 if you are married filing jointly. To qualify for this exclusion, you must meet the following conditions:

1. Ownership Test

You must have owned the home for at least two years out of the five years preceding the sale.

2. Use Test

You must have lived in the home as your primary residence for at least two years out of the five years preceding the sale. These two years do not need to be consecutive.

3. Frequency of Use

You cannot have excluded the gain from the sale of another home within the two-year period prior to this sale.

Situations Where the Sale May Be Taxable

If you do not meet the criteria above, the gain on the sale of your home could be taxable. Here are some scenarios where the sale might be taxable:

Short Ownership or Use:

If you have owned or lived in the home for less than the required two years.

Second Home or Investment Property:

If the home sold is a second home, vacation home, or investment property, the exclusion does not apply.

High Gains Exceeding Exclusion Limits:

If your gains exceed $250,000 (single filer) or $500,000 (married filing jointly), the excess amount is subject to capital gains tax.

Non-Qualified Use:

If you rented out the home or did not use it as your primary residence for periods outside of the five-year window, part of the gain could be taxable.

Prior Exclusion:

If you have claimed the exclusion on another home sale within the last two years, you generally cannot exclude gains on this sale.

Special Situations

There are exceptions to these rules, such as if you had to sell your home due to unforeseen circumstances (job change, health issues, etc.), where you may qualify for a partial exclusion of the gain.

A homeowner may qualify for a partial exclusion if the sale of the home is due to a change in employment that meets specific criteria:

1. Distance Test: The new place of employment must be at least 50 miles farther from the home being sold than the previous workplace was.
   • For example, if your old job was 10 miles from your home, your new job must be at least 60 miles away from your home to qualify.
2. Change in Job Location: The job change must result in a move to a new location that requires a change in residence. This can include a new job with the same employer, a new employer, or starting a new business in a different location.

Calculating the Partial Exclusion

If you qualify for a partial exclusion, the amount of the exclusion is prorated based on the length of time you lived in the home relative to the two-year requirement. Here’s how it works:

Formula for Partial Exclusion:

Maximum Exclusion×(Number of Months of Ownership/Use24)\text{Maximum Exclusion} \times \left( \frac{\text{Number of Months of Ownership/Use}}{24} \right)Maximum Exclusion×(24Number of Months of Ownership/Use​)

Example Calculation:

Suppose you are a single filer and lived in the home for 12 months before selling it due to a job change. The maximum exclusion for a single filer is $250,000.
Partial Exclusion=250,000×(1224)=250,000×0.5=125,000\text{Partial Exclusion} = 250,000 \times \left( \frac{12}{24} \right) = 250,000 \times 0.5 = 125,000Partial Exclusion=250,000×(2412​)=250,000×0.5=125,000
In this case, you could exclude up to $125,000 of gain from your income.

Other Qualifying Reasons for Partial Exclusion

Besides a job change, other circumstances may also qualify for a partial exclusion:

Health Reasons:

If the sale is due to a doctor-recommended move to treat or alleviate a disease, illness, or injury.

Unforeseen Circumstances:

Such as divorce, death, multiple births from the same pregnancy, or natural disasters.

Documentation and Proof

To claim a partial exclusion, you do not need to submit specific forms to the IRS, but you should keep records that clearly document the job change or other qualifying events. These could include:

• A letter from your employer stating the new job location.
• Employment contracts or job offer letters.
• Medical records (for health-related moves).
• Other evidence showing the reason for the sale.

In today’s fast-paced business environment, staying financially agile is crucial. At Michael D. Peroo, CPA, PA, we specialize in helping businesses sharpen their financial focus by providing a comprehensive evaluation based on industry benchmarks. We work with you to establish Key Performance Indicators (KPIs) that align with your business goals, ensuring you have the tools to measure success effectively.

Why Financial Focus Matters

Financial focus is more than just keeping track of your numbers; it’s about understanding what those numbers mean for your business’s future. By analyzing cash flow, inventory, and receivables, we help you gain a clear picture of your financial health. This insight allows you to make informed decisions that drive growth and sustainability.

What We Offer

• Industry Benchmarking: We evaluate your business against industry standards to identify areas of strength and opportunities for improvement.
• Key Performance Indicators (KPIs): We help you establish KPIs that are tailored to your business objectives, providing clear metrics to track progress.
• Trend Analysis: Stay ahead of the curve by identifying and responding to trends that impact your business.
• Cash Flow Management: We provide insights and strategies to optimize your cash flow, ensuring your business remains financially stable.
• Inventory and Receivables Analysis: Efficient management of inventory and receivables is critical to maintaining a healthy cash flow. We help you streamline these areas for better financial performance.

Partner with Us for a Brighter Financial Future

At Michael D. Peroo, CPA, PA we are committed to helping your business achieve financial clarity and success. Our personalized approach ensures that you have the right tools and insights to navigate the complexities of your financial landscape.

 

Receiving a lump sum distribution from a retirement plan can be a significant financial event, but it also comes with important tax implications. Whether you’re cashing out a 401(k), pension, or another qualified retirement plan, it’s crucial to understand how these distributions are taxed and what steps you can take to manage your tax liability. This article provides an overview of the taxes related to lump sum distributions and strategies to minimize their impact.

 

What is a Lump Sum Distribution?

A lump sum distribution is a one-time payment for the entire balance in your retirement account. This type of distribution can occur under several circumstances, such as retirement, job change, or the plan’s termination. While receiving a large sum of money may seem appealing, it’s essential to be aware of the tax consequences that accompany it.

 

Taxation of Lump Sum Distributions

The tax treatment of a lump sum distribution depends on several factors, including your age, the type of retirement plan, and whether the distribution is rolled over into another retirement account.

 

Ordinary Income Tax

• • Most lump sum distributions are subject to ordinary income tax. This means the amount you receive will be added to your taxable income for the year and taxed at your marginal tax rate.
  • Example: If you receive a $100,000 lump sum distribution and are in the 24% tax bracket, you could owe $24,000 in federal income tax on that distribution.

 

Early Withdrawal Penalty

• • If you’re younger than 59½, you may also be subject to a 10% early withdrawal penalty on the taxable portion of your distribution. This penalty is in addition to the ordinary income tax.
  • Exceptions: Certain circumstances, such as disability, death, or substantial medical expenses, may exempt you from the early withdrawal penalty.

 

Mandatory Withholding

• • When you receive a lump sum distribution from an employer-sponsored plan like a 401(k), the plan administrator is required to withhold 20% of the taxable portion for federal income taxes. This withholding is mandatory, even if you plan to roll over the distribution into another retirement account.
  • Note: The 20% withholding may not cover your entire tax liability, so you could owe additional taxes when you file your return.

 

State Income Taxes

• • In addition to federal taxes, you may owe state income taxes on your lump sum distribution, depending on where you live. The state tax rate varies, so it’s important to check with your state’s tax authority.

 

Net Unrealized Appreciation (NUA)

• • If your lump sum distribution includes employer stock, you may be eligible for special tax treatment on the Net Unrealized Appreciation (NUA) of the stock. The NUA is the increase in the value of the stock while it was held in your retirement plan.
  • Benefit: The NUA portion is taxed at long-term capital gains rates when you sell the stock, which may be lower than ordinary income tax rates.

 

Strategies to Minimize Taxes on Lump Sum Distributions

Given the potential tax burden, it’s wise to consider strategies that can help reduce the taxes owed on a lump sum distribution:

 

Direct Rollover

• • To avoid immediate taxation and penalties, consider rolling over the lump sum distribution into another qualified retirement account, such as an IRA. By doing a direct rollover, you defer taxes until you withdraw the money from the new account.
  • Benefit: A direct rollover avoids the 20% mandatory withholding and helps preserve the full value of your retirement savings.

 

Partial Rollover

• • If you don’t need the entire distribution for immediate expenses, you can roll over a portion of the lump sum into a retirement account and take the rest as cash. This strategy allows you to reduce the taxable amount while still accessing some funds.

 

Timing the Distribution

• • If possible, time your lump sum distribution for a year when your income is lower. This could place you in a lower tax bracket and reduce the overall tax impact.
  • Example: If you plan to retire soon and expect a significant drop in income, delaying your lump sum distribution until after retirement may save you money in taxes.

 

Consider Roth Conversion

• • If you expect your tax rate to be higher in retirement, you might consider converting part or all your lump sum distribution into a Roth IRA. While this would trigger taxes in the year of conversion, future withdrawals from the Roth IRA would be tax-free.

 

Taking Advantage of Exceptions

• • Review any available exceptions to the early withdrawal penalty if you’re under 59½. For example, if you’re retiring at age 55 or older, you may qualify for an exception if the distribution comes from a 401(k) with your most recent employer.

 

Conclusion

Receiving a lump sum distribution from a retirement plan comes with significant tax implications that can affect your financial future. By understanding the tax rules and exploring strategies to minimize your tax liability, you can make informed decisions that align with your retirement goals. Whether you choose to roll over the funds, take a partial distribution, or carefully time your withdrawal, planning can help you maximize the benefits of your retirement savings while minimizing the tax burden.