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Confusion has arisen regarding whether all amounts must be withdrawn annually or “cleaned out” in year 10.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.
Many of the expected tax law changes have not materialized, but legislation remains in flux. This means we plan year-end moves while we continue to monitor new legislation. It is safe to bet that income tax rates will rise over the next several years. This may mean putting year-end tax planning on its head, where you increase taxable income for 2021. The goal is to lessen income ultimately taxed in future years. However, you may not want to delay taking deductions until 2022 (so planning not completely on its head?) For the standard approach, see our 2020 year-end post.
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, RMDs, in future years (but non-spouse beneficiaries still face the 10-year limit from the SECURE Act on IRA distributions).
Back-Door Roth – Along with converting, the “back-door Roth” is still available, at least for 2021, 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. If you have other IRAs, that may affect the amount that is taxed, so review this carefully first to see if it still makes sense.
More income – Other ways to increase income for 2021 include billing more for your S Corp., LLC or partnership in 2021, exercising stock options, and selling ESPP shares.
Capital gains – You probably do not want to accelerate capital gains, as those should still be tax at a lower rate in future years.
On to other considerations: first, SALT deductions
The limit on state and local taxes, or SALT, may increase from $10,000 to $80,000. Also, a number of states have created pass-through entity elections so that the S Corp., LLC or partnership pays the tax and deducts 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.
The SALT changes may affect 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 2021, so be sure you withheld taxes or paid estimates.
Charities – If you cannot itemize, you still get up to $300 as an above the line charitable deduction, and up to $600 for a married couple.
Child credits – There are changes in the credits for children and dependent care. Let us know if you have questions on the benefits and strategies for maximizing.
Kiddie tax – The so-called kiddie tax has been restored to pre-TCJA terms, so you may want to review filings for the last two years.
Address change – You will want to file form 8822B to indicate the change of address if your corporation, LLC or partnership moves. On that form, you can also change the responsible party so that the IRS knows whom to contact – this is quite important if you sell your business!
IT PIN – If you are concerned about identity theft, consider obtaining an IT PIN as discussed in our post on IRS scams.
Flex and retirement accounts – Check to see if you have any flex account balances that expire; contribute the maximum to your qualified plans; and setup a new qualified plan if you have a new business.
Before you finish, check withholdings and estimates paid
Especially if you increase income in 2021, review your total paid to the IRS and state via withholdings and estimates make sure that you meet the safe harbor rules. If not, you could owe interest for under-withholding.
IRS disaster relief
Have you received a penalty notice from the IRS? The Pandemic was declared a federal disaster. This means it may provide an exemption to the penalties if you can show that you suffered from the Pandemic.
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 $12 million for 2021, but that may change in 2022. 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.
Update: the annual exclusion for gifts rises from $15,000 per person, per year to $16,000 next year.
If you do review your estate plan documents, also review beneficiary designations and asset ownership to make sure everything is current and flows correctly.
Summary
As you review your 2021-2022 tax planning, consider the impact of future tax rate increases: will bringing future income into 2021 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!
We have written previously stressing the need to have an estate plan, so you do not leave a mess, and why you may need life insurance to protect others. Few people will disagree with the need to have a current plan and to provide for survivors, but not everyone acts.
So, why is it that people fail to take action? Rick Kahler wrote recently about Overcoming Client Procrastination with Financial Planning. In his post, he lists factors that cause people to put off action that agree is important to address:
Avoidance. Feelings of self-doubt, fear of pain or anxiety around the task, depression, fear of asking for help, lack of trust.
Perfectionism. Fear of failure, fear of being criticized (both externally by others and – often more powerfully – internally by parts of yourself).
Ambiguity. Lack of clarity about the task, feeling overwhelmed, difficulty prioritizing in the absence of a crises, being focused on immediate tasks.
Narcissism. Over-confidence in getting it done at the last minute. Needing chaos or pressure to provide adrenaline, the ability to focus to the exclusion of everything else, and a feeling of being fully alive.
Physical Issues. Fatigue, illness.
Lack of knowledge. Not knowing what you don’t know, unsure how to get needed help and information.
Financial. Not having the funds to take the necessary action.
Do any of these apply to you? If so, we can help so please contact us.
Why you should:
One reason to review your estate plan is that the Biden administration may seek changes to the estate and income tax laws; you want to make sure your documents have the flexibility to address these changes. The current federal gift and estate tax credit is close to $12 million. However, it is scheduled to drop to between $5.5 and $6 million in 2025 and the administration may push for a lower credit to be imposed sooner. Also, the administration may try to eliminate the step-up in basis at death. We will continue to monitor any proposed law changes and post updates.
There are other tax law changes to address, such as the elimination of the “stretch IRA.” You may need to revise your beneficiaries. Also, you will want your executor or personal representative to elect portability of your federal credit to minimize taxes and may want your documents to address the generation skipping transfer tax credit.
Another reason to act is to provide for your digital assets, something old documents may not address. For example, you can give your attorney-in-fact under your durable power of attorney access to your digital assets and you can assign your digital assets to your revocable trust so your trustee has access. Digital assets include e-mail and text messages, photographs, videos and other files on your computer, on-line accounts such as your investments and social media, or even intellectual property and patent rights. You may also have collectibles that need to be addressed,
Another reason to act is to ensure that someone knows how to access all your passwords if something happens to you. Create your own “Rosetta Stone,” a document telling them how to access your digital life, with IDs and passwords, and then make sure an immediate family member or close friend knows where to find it. This way, they can locate all your important documents, find assets and insurance, and handle your social media if something happens. You may also want to provide a memorandum to your personal representatives and trustees detailing your wishes, including thoughts on when to distribute to children, protecting from creditors, and even burial or cremation.
If you to take the time now to review and update your plan, be sure:
that you have documents that are in order,
that the documents are correctly executed,
that you provided adequate resources for survivors, including life insurance, and
that your beneficiary designations and asset ownership all coordinate with your documents.
When you do, you will have improved matters for you and your family!
Contact our office if you have any questions or comments. And be well!
Here is a good news release from the IRS site worth reviewing
Important reminders before filing 2020 tax returns
WASHINGTON — Following an unpredictable year with many changes and challenges, the Internal Revenue Service today shared important reminders for taxpayers who are about to file their 2020 federal tax returns.
Choose direct deposit The safest, most accurate and fastest way to get a refund is to electronically file and choose direct deposit. Direct deposit means any tax refund is electronically deposited for free into a taxpayer’s financial account.
Eight out of 10 taxpayers get their refunds by using direct deposit. It is simple, safe and secure. This is the same electronic transfer system used to deposit nearly 98% of all Social Security and Veterans Affairs benefits into millions of accounts.
Earned Income Tax Credit The Earned Income Tax Credit (EITC) can give qualifying workers with low-to-moderate income a substantial financial boost. EITC not only reduces the amount of tax someone owes but may give them a refund even if they don’t owe any taxes or aren’t required to file a return.
People must meet certain requirements and file a federal tax return in order to receive this credit. The EITC assistant on IRS.gov can help people determine if they qualify.
The IRS reminds taxpayers that they may elect to use their 2019 earned income to figure the EITC if their 2019 earned income is more than their 2020 earned income. For details, see Publication 596, Earned Income Credit. Taxpayers also have the option of using their 2019 income to figure the Additional Child Tax Credit for 2020.
Taxable unemployment compensation Millions of Americans received unemployment compensation in 2020, many of them for the first time. This compensation is taxable and must be included as gross income on their tax return.
Taxpayers can elect to have federal taxes withheld from their unemployment benefits or make estimated tax payments, but many do not take these options. In that case, taxes on those benefits will be paid when the 2020 tax return is filed. Taxes can be paid throughout the year. For safe and secure ways to pay taxes electronically go to IRS.gov/payments.
Taxpayers can find more details on taxable unemployment compensation in Tax Topic 418, Unemployment Compensation, or in Publication 525, Taxable and Nontaxable Income, on IRS.gov.
Interest is taxable income Many individual taxpayers who received a refund on their 2019 tax returns also received interest from the IRS. The interest payments were largely the result of the postponed filing deadline of July 15 due to the COVID-19 pandemic.
The 2019 refund interest payments are taxable, and taxpayers must report the interest on their 2020 federal income tax return.
The IRS will send a Form 1099-INT to anyone who receives interest totaling at least $10. The average refund interest amount is $18, but the amount for each taxpayer varies based on the tax refund that the taxpayer received. Form 1099-INT will be issued no later than Feb. 1, 2021.
Home office deduction The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy.
However, the Tax Cuts and Jobs Act suspended the business-use-of-home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home. IRS Publication 587, Business Use of Your Home, provides more on the home office deduction.
Workers moving into the gig economy Many people found different employment in 2020, including jobs in the gig economy. Taxpayers must report income earned in the gig economy on their tax return. However, gig-economy workers generally do not have taxes withheld from their pay as salaried workers normally do. The IRS encourages people earning income in the gig economy to consider making quarterly estimated tax payments to stay current with their federal tax obligations.
Charitable donation deduction for people who don’t itemize Individuals who take the standard deduction generally cannot claim a deduction for their charitable contributions. However, the CARES Act permits these individuals to claim a limited deduction on their 2020 federal income tax returns for cash contributions made to certain qualifying charitable organizations and still claim the standard deduction. Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify.
Before making a donation, the IRS reminds people they can check the special Tax Exempt Organization Search (TEOS) tool on IRS.gov to make sure the organization is eligible for tax-deductible donations.
Under this change, individuals can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2020. This deduction does not apply to donated property. The maximum deduction is $150 for married individuals filing separate returns. More information is available in Publication 526, Charitable Contributions, on IRS.gov.
Disasters such as wildfires, flooding or hurricanes Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area. Some 2020 tax deadlines in certain counties have been extended into 2021 due to recent wildfires, hurricanes or flooding.
