As we step into 2024, it’s essential for us to keep our clients informed about the latest tax changes that may impact their financial strategies. As a dentist, you should stay on top of any updates to tax laws that could affect your dental practice. This will help you make informed decisions and ensure that you are taking advantage of any available benefits.
Most of these changes come from the SECURE Act 2.0, a law from 2022, that introduces several significant alterations and offers new opportunities and exceptions for early retirement account withdrawals. Since there are a lot of important details to keep up with, we gathered some crucial information and key updates you need to know, as these changes might reshape your financial planning in the coming years.
Escaping the 10% Early Withdrawal Penalty:
Typically, withdrawing funds from your retirement account before reaching the age of 59 1/2 comes with a 10% penalty, in addition to regular income tax. However, the SECURE Act 2.0 brings good news for those facing financial emergencies, domestic abuse, terminal illness, or disasters. Starting in 2024, new exceptions allow you to escape the 10% penalty under specific circumstances.
The new law offers the chance to combine specific penalty escapes. For instance, in a given year, you can opt for both a penalty-free emergency personal expense distribution and a domestic abuse distribution, totaling up to $11,000. If something happens with your residence in the same year, you can include an extra $22,000.
New Emergency Personal Expense Exception (2024):
The SECURE Act 2.0 introduces a new emergency personal expense withdrawal exception, providing relief for unforeseeable financial needs relating to personal or family emergencies. Though limited to $1,000 per year, this exception allows flexibility in times of crisis.
This can cover just about anything, such as education expenses or a first-time home purchase. You only need to give a written certification to the plan administrator stating that the withdrawal is for an emergency.
Be aware that you can only take another emergency personal expense distribution in a subsequent year if one of these conditions is met:
- you fully repay the previous distribution
- the total of your contributions to the plan equals or surpasses the previous distribution
- or three years have passed since the last distribution
Domestic Abuse Exception (2024):
Victims of domestic abuse can now make penalty-free withdrawals from their retirement accounts, up to $10,000 or 50% of their vested balance, starting in 2024. The broad definition of domestic abuse includes various forms of mistreatment, such as physical, psychological, sexual, emotional, or economic oppression.
Individuals can self-certify their eligibility for this exception, and the withdrawal is meant to provide financial support for survivors who may need to leave abusive situations. Additionally, penalty-free withdrawals provide a measure of flexibility and autonomy, allowing survivors to regain control over their financial well-being.
Terminal Illness Exception (Immediate):
Individuals facing terminal illnesses can now make penalty-free retirement account distributions of any amount, with a seven-year survival rate criterion. The individual must be certified by a doctor as having a terminal illness. This extension beyond the usual two-year definition opens opportunities for those dealing with severe health conditions, even if they are still able to work.
Long-Term Care Exception (2026):
Starting in 2026, retirement account owners can take penalty-free annual distributions of up to 10% of their vested balance or $2,500 (adjusted for inflation) to cover long-term care insurance. To meet the criteria for this exception, you must have paid or been assessed long-term care insurance premiums that are equal to or exceed the distribution amount in the year it is issued.
Furthermore, you must provide your plan administrator with a “Long-Term Care Premium Statement” that includes information about your long-term insurance.
Disaster Recovery Exception (2021 Onwards):
The SECURE Act 2.0 reinstates and makes permanent the disaster recovery exception for federally declared disasters such as hurricanes, floods, and fires. While the maximum penalty-free withdrawal amount is reduced to $22,000, individuals affected by disasters have the flexibility to spread income over three years or repay the distribution within three years.
Age 50 Exception for Public Safety Workers:
For public safety workers, the age 50 exception is expanded, allowing private-sector firefighters, corrections officers, and forensic security employees to make penalty-free withdrawals from their retirement accounts when separating from service at or after turning 50. Moreover, public safety workers with 25 or more years of service can access penalty-free withdrawals before reaching age 50.
It’s important to note that in certain emergencies or disaster response scenarios where medical professionals, including dentists, may be called upon to provide assistance, they could indirectly contribute to public safety efforts. The classification may vary based on specific contexts and local policies.
BOI Reporting Requirements (2024):
Recently, we posted an announcement about the BOI reporting requirements — Significant Update from the FinCEN. In 2024, the Corporate Transparency Act (CTA) introduced a new federal filing requirement for small businesses and rentals formed using a limited liability company (LLC). This requirement entails submitting two reports—the Beneficial Owner Information (BOI) report and the Company Applicant Information report—to the Financial Crimes Enforcement Network (FinCEN).
Non-compliance with these filings can result in severe penalties, including civil fines of up to $10,000, and potential criminal penalties, such as imprisonment for providing false information. The CTA applies to most small business entities formed through filings with state authorities, excluding sole proprietors. Approximately 5 million new small businesses annually are estimated to be subject to the CTA, with exemptions for certain larger operating companies and specific entities.
Employee Retention Credit:
The last update for today is about the IRS’s recent communication on the Employee Retention Credit (ERC), published in September 2023, which has created uncertainty and concern among tax professionals and business owners. The IRS’s decision to halt new ERC claim processing, its extended processing timelines for existing claims, and the release of a potentially negatively toned Q&A document have sparked reactions.
Despite the challenges, businesses with valid ERC claims must submit them promptly, securing their place in line. Remember that 2020 ERC claims must be submitted by April 15, 2024. If your ERC claim is valid, patience is key. Additionally, it is essential to ensure that you have the necessary documents to support your claim. If you suspect your ERC is not valid, review the possibilities in IR-2023-169 and discuss them with your tax professional. We hope this article clarifies your questions about the new changes. As part of our commitment to keeping dentists informed, we’ll continue to share valuable tips and news on our blog. Don’t miss out – stay tuned for future updates to navigate the complexities of tax management effectively.