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Confusion has arisen regarding whether all amounts must be withdrawn annually or “cleaned out” in year 10.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.
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.
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.
We are assaulted by people trying to access our information for their benefit or trying to trick us into sending a payment fraudulently. Now, with all the news on artificial intelligence, we will see even more ways we may be assaulted.
How do you protect yourself?
The first step: Think before panicking and reacting; careful observation could save you from a scam!
Here are some examples, starting with familiar ones:
Do you really think you won a lottery you never entered? There is an old joke about not buying a ticket.
Do you actually think you are the one randomly chosen to receive an inheritance from someone in another country that supposedly has no heirs? The estate mentioned is often from a country you may never have visited, and the estate is an enormous amount, so probability says it cannot be real.
If Amazon really thinks there is fraud, why does the person answering the call say “Thanks for calling Amazon” when the call came from them, and why do they know nothing about your account so that they have to ask for your information? If there was a fraud, they would be telling you about the transaction instead of asking for all your account details.
No one stole your credit card, and you know you did not buy a MacBook or Airpods, so why is someone calling from the Netherlands to claim a purchase was made on your account? Often you can tell that the callers are not from the companies they claim.
It may look like a Microsoft message, but why do you suddenly need to update your account? Check the source of the message – we have seen official-looking messages from many dubious senders, including some from Japan and Russia. Be wary of e-mails from random accounts rather than the actual vendor.
If you receive notice of an unauthorized payment or overdue bill, or even a payment authorization you didn’t expect, don’t click on the link, go to the vendor’s website to access via a browser you trust to check before responding. The link in a text or e-mail may appear okay but close examination reveals some flaw.
The same applies if you receive a DocuSign notice: make sure the sender is legitimate. Clicking on the link could allow them to install malware and gain access to your financial information.
Here’s another example: We recently had someone claim to have seen our website and want to hire us for tax work. When we asked for more information about their situation, including the state in which they filed, the response was a message asking to click on links to their information. The fact that they did not respond to questions about hiring a tax professional was a tip-off. The IRS warns:
Thieves take time to craft personalized emails to entice tax professionals to open a link embedded in the email or open an attachment. Tax pros have been especially vulnerable to spear phishing scams from thieves posing as potential clients. Thieves might carry on an email conversation with their target for several days before sending the email containing a link or attachment. The link or attachment may secretly download software onto tax pros’ computers that will give the thieves remote access to the tax professionals’ systems.
You can avert risks by being very suspicious, as well as being cautious.
More steps: you will also want to monitor your credit, even freeze your credit accounts, make sure your computer and smartphone software is up to date, use two-factor verification, run your malware and antivirus scans frequently, and respond to any alerts. For more ideas such as getting an PIN from the IRS, see our post on Phishy Phone calls. Here is good reminder from the IRS:
The IRS will never contact a taxpayer using social media or text message. The first contact from the IRS usually comes in the mail. Taxpayers who are unsure whether they owe money to the IRS can view their tax account information on IRS.gov.
Let me know if you have any questions or comments and stay cautious!
With inflation hitting 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. With that in mind, we updated our suggested gifts and tips for 2022 on our sister website.
Gift giving etiquette may not always be obvious when considering gifts for people outside of your friends and family, so be mindful of the message you send. Giving should show appreciation and respect. Sometimes a smile, a note or a kind word can really make someone’s day.
Checking your income tax planning now is a good idea – tax planning can be done year-round. As with any planning, acting while you can have an impact is best. Tax laws may change before the end of 2022, e.g. Secure Act 2.0 may be adopted, but it’s still wise to know where you stand now.
The IRS seems to have a similar thought about tax planning as they created a website with tools and resources at Steps to Take Now to Get a Jump on Your Taxes – if you check it out, let us know what you think.
First question: did you get a tax refund, or did you owe?
Refunds
Some people enjoy seeing a big refund, but as you may have heard, you are giving the government an interest-free loan with your money. If you want to save, there are better ways, like an auto-debit to an IRA or to a savings account.
Not sure what happened to your refund? There is a updated IRS tool for “where’s my refund” that now goes back three years at “Where’s My Refund?”
The tool confirms receipt of your tax return, shows if the refund has been approved and indicates when it will be or has been sent. If three weeks pass without receiving the refund, then you may want to contact the IRS.
Owed taxes
If you owed a significant amount for 2021, the IRS has another tool that helps make sure you have enough withheld for 2022 at Tax Withholding Estimator. This way you can avoid penalties and interest for under withholding.
If you do not get clear answers using the estimator tool, try comparing your 2022 paystub to your 2021 tax return, review the IRS guidance at Publication 505, or contact us for help.
Second question: what happens if you act now?
Marginal vs. average tax rate
Knowing the rate at which additional net income will be taxed helps you make decisions such as the one in the next section, whether to convert an IRA to a Roth IRA or not.
The marginal rate is your tax bracket, the rate at which the last portion of your income is taxed. Any additional income would be taxed at this rate. Your average tax rate is the percentage of income taxes to total taxable income. You can have a low average rate but hit a high marginal rate, which may mean that taking more income into the current year would be costly.
Time to convert to a Roth IRA?
The decision to convert a traditional IRA to a Roth IRA depends on several factors. One is the rate of tax you pay now compared to the rate you expect to pay in retirement. If your rate will be the same at retirement as now, then there are many reasons to convert, such as no required minimum distributions at retirement for a Roth IRA. If your tax rate at retirement will be significantly less than currently, then converting now would be less tax efficient.
Last question: how with this affect the rest of your finance?
Coordinate with investing and estate planning
Make sure any changes take for tax reasons do not foul your investment or estate planning. For more on estate planning, see estate planning checkup post.
Summary
As you review your 2022 tax planning, check your 2021 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.
