A collection of thoughts and links for 2023 tax prep season

Tax Season Tips and Links

As we gear up for tax season, here is a collection of thoughts and suggestions:

As noted previously, the TCJA expires after 2025, so we encourage planning for all those changes.  For some ideas, see our post on turn tax planning on its head for income taxes and see this post on estate planning.

When you work on your IRS form 1040 for 2023, how do you plan to answer the question on digital assets?  That question has changed over the years and now reads:

At any time during 2023, did you:  (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)? 

2023 form 1040

Some tax pros think this question covers items such as a ticket for events like the Super Bowl, as these are non-fungible tokens, or NFTs, being unique and recorded in digital ledgers.  Therefore, if you purchased such an NFT, you need to answer “yes.”  When in doubt, saying yes may be the best response.

We reported that the SECURE Act 2.0 allows for unused 529 plan contributions to go into a Roth IRAs.  Here is a planning suggestion for parents and grandparents:  start early with 529 plan contributions so that there is a surplus over college costs that can be converted to a Roth later, within the limits.  

There are also some significant cases before the Supreme Court we are watching, including the Moore case on unrealized income.  

The IRS continues to deal with a huge backlog of mail to process, including many amended returns.  They say that this is due to prioritizing answering calls over processing during the Pandemic.

And the IRS warns again to be wary of phishing attempts by phone, e-mail and text.  They have a page on phishing and how to respond.

Massachusetts changed the estate tax law so we now have a true exemption of $2 million.  This may tilt more toward planning to avoid capital gains rather than estate taxes.  

For more ideas, please see “Year-end Tax Planning 2023-2024 and recent changes” to read more and let us know if you want to discuss any of the strategies. 

Let me know if you want to discuss anything. 

Thank you and be well.

Steven

Holiday gift and tipping guide 2023 update

“The best way to not feel hopeless is to get up and do something.  Don’t wait for good things to happen to you. If you go out and make some good things happen, you will fill the world with hope, you will fill yourself with hope.” ― Barack Obama

With inflation still a concern for many and their ability to support families, the holidays may be the time to say a special “thank you” to those who help keep us and our families, homes and businesses on track, who keep our homes clean, help us stay fit, and help us in other ways to get through each day throughout the year. 

Please be mindful that the message you intend may not always be obvious.  Any giving should show appreciation and respect.  Sometimes a smile, a kind word or even a note can really make someone’s day and have more lasting meaning than a Starbucks gift card.  

For those you can’t tip, you can still make them feel appreciated

The Pandemic has made us more appreciative of first responders and health care workers.  Many houses still display a sign with a red heart to say thank you.  

You can also send letters of thanks directly to a local hospital, fire station or police department or send a meal or buy coffee.  Check for any online bulletin board in your town, both to post a thank you note and to see if there are other ways to acknowledge your local first responders. 

“Neither snow nor rain…”

Despite the weather, terrain or traffic, your mail carriers, FedEx, UPS and Amazon drivers deliver your mail and packages every day and ensure that your online purchases arrive on time and in good condition. 

As you decide what and how much to give, check each particular company’s gift giving restrictions:

1.  Mail carriers – are prohibited from receiving cash gifts and gifts of more than $20.  Unfortunately, the limit has not increased for inflation.

2.  Garbage and recycling pickup – depending on what municipal rules permit, we suggest $25-$35.

3.  FedEx – employees are prohibited from accepting gifts, but a wave, a smile or a note would be nice.

4.  UPS – workers are allowed to accept tips, but UPS discourages the practice.

5.  Newspaper delivery – if you still get the news in print, a gift of $25-$35 is standard.

6.  Amazon driver – we suggest the same as for newspaper delivery. 

7.  Food delivery and curbside pickup – again we suggest the same as for newspaper delivery.

Caregivers (for kids, parents and pets, too!)

Caregivers for your children, parents and pets can be lifesavers as they provide care, education, exercise, and attention to those you care about most.  This is the time of year to let them know how thankful you are for all that they do.  The amount of service they provide and the arrangement you have with them can dictate the appropriate gift level:

1.  Nanny/au pair – a week’s salary and a small gift.

2.  Daycare teachers – a $25-$75 gift.

3.  Home healthcare worker – from one week up to a month’s salary.  If tips are not permitted, consider cooking or baking something special.  If the care is in a senior living or hospital setting, be sure to cover the whole shift.

4.  Teacher – a small gift and a handmade card from your child.  Note that a cash gift could be misconstrued as a bribe.  You can pool resources with other parents for a gift card. 

5.  Dog walker – depending on your walker’s schedule, you may want to give a day’s pay or a full week’s pay.

6.  Dog groomer – from half up to the full cost for a single service.

If you contract any of these services through an agency, you may want to contact the agency to find out if they have a gift-giving policy in effect.  If the agency prohibits gifts, consider alternatives like making a donation to the agency or sending in homemade cookies to the office – or sneak a Starbucks card into their stockings. 

Home Maintenance

Whether you live in a single-family home or a large apartment building, it’s likely there is someone who services your home or property in some way. 

1.  Trash and recycling collectors – a gift of $25-$35, which you may want to mail directly to the collection company if you can’t safely leave for the collectors.

2.  Doorman – a gift of $25-$100, depending on their role this year.

3.  Regular cleaning person – the cost of one visit.

4.  Landscapers/gardeners – a gift of $25-$50 per person or if you have just one person doing the work, the cost of one visit.

5.  Parking garage attendant – a gift of $25-$50.

6.  Building’s handyman, superintendent and custodian – a gift of $25-$100.

If you have someone who always goes the extra mile, such as a handyman who’s prompt and efficient or a doorman who is quick to carry heavy packages for you, then a larger tip may be warranted. 

Personal Services

It’s hard work keeping you fit, perfectly coiffed and beautiful, and ready to face the day.  Now is a good time to show appreciation for those efforts, especially when they help you get that special appointment when you really need it.  In deciding whether to tip and how much, consider this:

1.  Hairdresser/manicurist – if you’re a frequent visitor, tip the cost of one visit.  If you’re a less frequent customer, then $20.  However, if you tip generously through the year, you do not need to give an extra tip at the end of the year.  If multiple people work on your hair, divide the tip among them.  And if any of them double as your therapist, add a bit more!

2.  Personal trainer – up to the cost of one visit.

3.  Massage therapist – also up to cost of one visit.

4.  Golf or tennis         instructor or sax teacher – a thoughtful gift.

If you’re unable to tip or give a gift, a thoughtful thank you note will acknowledge the good work these people do for you throughout the year.   

Good feedback is appreciated by their supervisor as well as by the people who are helping you out. 

Send a thank you note to the supervisors of the people who provide you with great service throughout the year, letting them know how impressed you are with the service their people provide.

If you have any more ideas, let us know! 

Be safe and stay well! 

  • Steven

Year-end Tax Planning 2023-2024 and recent changes

Tax planning overview and changes to review

First, some reminders:  income tax rates are likely to rise over the next several years and the TCJA rules expire after 2025, when we revert to pre-2018 tax laws.

Second, be practical:  start with reviewing what items you are able to change – for example, paying real estate taxes in one year may be better than another, but that is very hard to accomplish if you have escrow withholding on your mortgage payments.  On the other hand, you may be able to incur medical expenses all in one year, so you exceed the limit and are able to deduct a portion. 

Two-year goal: usually the goal is to reduce the total tax for the two years combined, some may benefit from increasing 2023 income to avoid higher future taxes.  One way to increase income that we have discussed before is a Roth conversion.

2023 changes:  There are a number of changes for this year, including rules for electric vehicles (EVs), energy efficient improvements, and other items, along with the impact of inflation on thresholds and exemptions for some items.

  • If you are considering energy efficient windows, doors, etc., the limits for the Energy Efficient Home Improvement Credit for 30% of the cost increased for 2023.  As for solar panels, fuel cells, battery storage, there is the Residential Energy Clean Property Credit of 30% of the cost of materials and installation.  Check to see if your anticipated improvements qualify and then retain the information needed to file for the credit.
  • As we noted previously, the clean vehicle credit for new and used EV purchases has changed, with vehicle price and income limits.  So, again, check to see if you qualify and then be sure to retain the information needed to file for the credit.

Retirement plans:  The age for required minimum distributions (RMDs) is now 73, so taxpayers turning 73 in 2023 have until April 1, 2024 to take their first RMD.  Tax planning on this is crucial, as taking the RMD before 2024 may result in a lower total tax for 2023 plus 2024 as you have the 2024 RMD due in 2024.  That is, two RMDs in 2024 could push you into a higher tax bracket.  

Charities:  For charitable giving, see if you can donate appreciated assets directly and avoid the capital gains tax.  Also, if you are considering a qualified charitable distribution (QCD), up to $100,000 counts for your RMD and you can send up to $50,000 to a charitable remainder annuity trust, charitable remainder unitrust or a charitable gift annuity. Many private colleges with charitable gift annuity programs have focused donation drives on QCDs.

Estates:  As noted in a prior post, the annual exclusion for gifting is now $17,000.  If you have plans to transfer wealth, keep this in mind.   

Withholdings:  As you adjust income and deductions, your tax due for each you will change, so be sure to review the safe harbor rules on withholdings and adjust or pay estimates as needed. 

Some ways to shift income:

  • Roth Conversion – One way to increase income now, avoiding future income, is to convert part of an IRA to a Roth IRA, converting from taxable to non-taxable distributions in the future.  Decide on the amount to convert by projecting the impact of the conversion on your marginal tax rate.  Converting to a Roth also saves you from required minimum distributions in future years (but non-spouse beneficiaries still face the 10-year clean-out we discussed before as part of the SECURE Act). 
  • Back-Door Roth – Along with converting, the “back-door Roth” is still available, at least for 2023, so you can put more retirement funds aside with no tax on future distributions.  That is, for those who cannot contribute to a Roth due to income limits, they can contribute to a non-deductible IRA and then convert that IRA to a Roth IRA. 
  • More income and deductions – Other ways to shift income include billing more in 2023 or delaying to 2024 for your S Corp., LLC or partnership, exercising stock options, and selling ESPP shares.  Businesses can buy vehicles and other capital assets for bonus depreciation write-offs in 2023.
  • Capital gains – You probably do not want to accelerate capital gains, as those should still be taxed at a lower rate in future years.  But you can utilize tax-loss harvesting to shelter gains already realized for 2023 by identifying any losses and realizing them in 2023.  If you want to buy back these securities, watch out for the wash-sale rules. 

On to other considerations – first, SALT deductions

The limit on state and local taxes, or SALT, has not increased, but, a number of states have created pass-through entity elections so that the S Corp., LLC or partnership pays the tax and deducts it against the income of the shareholder/member/partner.  This way, their net federal taxable income is reduced, and they get a credit for the payment on their personal tax returns. 

Review the SALT portion of your itemized deduction strategy if you are bunching. 

Check the details:

Declare Crypto – If you had any crypto currency transactions during the year, selling, buying or receiving, be sure to declare on your federal 1040 filing.

Unemployment tax – Remember, unemployment benefits are fully taxable for 2023, so be sure you withheld taxes or pay estimates. 

IT PIN – If you are concerned about identity theft, consider obtaining an IT PIN as discussed in our post on IRS scams.  

Flex accounts – Check to see if you have any flex account balances that expire that can still be used.  And consider HSA contributions.

Qualified plans and IRAs – Make sure to max-out on your 401(k) and other plans and make an IRA contribution if you can. 

Before you finish, check withholdings and estimates paid

Especially if you increase income in 2023, review your total paid to the IRS and state via withholdings and estimates to be sure that you meet the safe harbor rules.  If not, you could owe interest for under-withholding.

IRS disaster relief 

If you are in an area designated as a federal disaster area, this may affect your filing deadlines and ability to take casualty losses. 

And remember your estate plan review

While you review your taxes, review your estate plan as well.  The federal gift and estate tax credit  is close to $13 million for 2023, but that may change in 2024.  So, if you have excess wealth, you may want to gift while you can, especially if you want to use certain trusts, like a GRAT or QPRT, that may no longer be permitted in future years.  For more on estate planning updates, see our estate planning checkup post

  • If you do review your estate plan documents, also review beneficiary designations and asset ownership to make sure everything is current and flows correctly. 
  • For Massachusetts residents, the exemption increased from $1 million to $2 million as of January 1, 2023.  This may affect your portability planning on income and estate taxes in an estate – see Should your estate plan try to avoid income taxes rather than avoid estate taxes? for planning ideas.

Summary

As you review your 2023-2024 tax planning, consider the impact of future tax rate increases: will bringing future income into 2023 avoid taxes on future income?  Then follow through on the details. 

Let us know if you have any questions. 

Good luck and best wishes for happy and healthy holidays!

Steven

Planning for the 10-year clean out rule and inherited IRAs

Inherited IRAs and RMDs

The SECURE Act of 2019 eliminated the “stretch IRA,” where children could continue to defer taxes on IRA balances inherited from parents, even passing them on to grandchildren.  This had allowed for decades of tax-free asset growth.  Congress decided to curtail the deferral past spouses by requiring that IRAs passed to non-spouses be fully distributed at the end of 10 years, with a few exceptions. 

Confusion has arisen regarding whether all amounts must be withdrawn annually or “cleaned out” in year 10.  The IRS added to the confusion by offering different interpretations after the law was enacted.  To address this confusion, the IRS responded by not penalizing IRA beneficiaries who failed to take distributions while the rules are finalized. 

The IRS proposed rules require that annual distributions continue if the original IRA owner had begun taking required minimum distributions (“RMDs”), while allowing beneficiaries of IRA owners who had not begun taking RMDs to choose to take some distributions or wait until the 10th year. 

An heir will need to plan to minimize the tax hit.  For example, they may be able to keep their total income in a lower tax bracket.  The simplest approach may be to just take 1/10th each year, so they do not end up in a higher bracket.  This may not be best if the beneficiary’s income has significant changes for bonuses, major stock sales, taking their own RMDs or starting social security.  We reviewed possible strategies with Harold Hallstein IV of the Sankala Group who said that, surprisingly, someone in a low tax bracket who expects to be in a higher bracket in the future may benefit from taking the account balance right away, thereby availing themselves of long-term capital gains rates on future investment growth. 

One note of caution: beneficiaries need to be sure to set up the inherited IRA account and not take a check, as that will be fully taxable.   

Let us know if you have any questions. 

Good luck

Steven

Mid-year planning for SECURE Act 2.0 and inflation impact

Mid-Year planning   

The goal of this post is to help you become informed about tax law changes for 2023, so you can respond during the year and save on what you owe next April.  As with any planning, acting while you can have an impact is crucial.  There may be more new tax laws on the way, so stay informed. 

Your planning may vary depending on whether you owed for 2022 or received a refund.  For more on adjusting withholding (and back-door Roth conversions), see our prior post on mid-year planning 2022.  Also, check out the IRS website Steps to Take Now to Get a Jump on Your Taxes.

Tax Law Changes – SECURE Act 2.0 and inflation adjustments

The SECURE Act 2.0 finally passed in December of 2022, following the 2019 SECURE Act as a continued effort to encourage taxpayers to save for retirement.  We explore some highlights below.

Contemporaneously, inflation has raised contribution limits for 401(k) plans, IRAs and other qualified plans and the income limits for contributing to Roth IRAs have gone up.  Inflation adjustments also raised the income limit for deducting student loan interest and the AMT exemption.  The $100,000 cap on the qualified charitable distribution (QCD) will now be indexed for inflation.  Let us know if you need any details. 

You can start RMDs at a later age now

Some SECURE Act 2.0 changes take effect in 2023 and others in 2024.  For 2023, the age to begin taking your required minimum distribution (RMD) begins at age 73.  Someone turning 73 in 2023 must take the first RMD by April 1, 2024.  Those who continue to work past 73 may be able to delay taking RMDs from their current employer’s 401(k) until they retire.   

Beginning in 2024, Roth 401(k) owners no longer have to take RMDs. 

Considering buying an EV?  The rules changed                       

As we wrote last December, the maximum credit for an electric vehicle or EV is still $7,500, but the rules have changed, focusing on critical mineral and battery content along with assembly in North America.  Furthermore, the manufacturer limit is gone but now there is a vehicle price limit of $55,000 for sedans and $80,000 for vans, SUVs, and pickup trucks, as well as an income limit of $300,000 for joint filers and half that for single filers.  A credit for used EVs was also enacted, with a smaller credit and lower income limits.   

Revamped home energy credits

If you plan to install an alternative energy system, which includes solar, fuel cell, battery-storage, and wind, to your main home, you may qualify for a credit of 30% of the cost for 2023 to 2032, dropping after that and finally expiring in 2035.  The credit is reduced by any rebate from the utility company. 

The 10% credit available for 2022 is now 30% for installing certain types of insulation, water heaters, boilers, central air, etc. and the limit has been increased to $1,200 through 2032.  Other home energy expenditures have lower credits. 

IRS enforcement

The IRS received a massive budget increase, some of which was undermined by the debt ceiling negotiations.  As much as half of that increase is ear-marked for enforcement, and that is supposed to focus on corporations, partnerships and higher income taxpayers, meaning over $400,000.  The IRS is hiring and staffing in order to put their plan into action. 

A new way to convert to a Roth IRA

The SECURE Act 2.0 allows up to $35,000 to be rolled over from a 529 plan to a Roth IRA beginning in 2024. 

We encourage you again to consider converting, see “To Roth or not to Roth?” or check out Pros and Cons here.  Also, we discussed the back-door Roth IRA in our year-end post on 2021 tax planning.  

Coordinate with investing and estate planning

The federal credit for gift and estate taxes jumped to $12,920,000 and the annual gift tax exclusion to $17,000. 

Make sure that any changes that you take for tax reasons do not run counter to your investment or estate planning.  For more on estate planning, see estate planning checkup post

Summary

As you review your 2023 tax planning, check your 2022 returns for ideas on what to adjust, consider the impact of future tax rate increases and act when the impact on other planning also makes sense. 

Let us know if you have any questions. 

Good luck

Steven