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

Year-end Tax Planning 2022-2023 and Inflation

Why year-end planning?

We are told to act before year end because it is our last chance to have an impact on our 2022 taxes.  Planning throughout the year could be even better, if you recognize when to act, but most of us are pulled in so many directions that it is hard to organize and act until there is an external pressure, such as the looming end to the calendar year.  So, when you are ready to take stock of your situation, you can make the planning effort even more productive by reviewing your investments, estate plan, and finances, not just your taxes – consider it a “financial checkup.” 

Overview

This year, there are changes that occurred due to inflation as well as legislation.  While we had expected tax increases, none materialized (there may still be tax law changes, but legislation such as the “SECURE Act 2.0,” child credit and tax extenders all remain in flux).  We review the changes that did occur before turning to actual year-end tax planning strategies. 

Impact of inflation

Is there ever a good side to inflation?  Perhaps the IRS adjustments to several tax-related thresholds that change for 2023 count, such as these:

The standard deduction MFJ             $27,700                       up from $25,900

The gift and estate tax credit              $12.92 million             from just over $12 million

The annual gift tax exclusion             $17,000                       up from $16,000

401(k) maximum contribution             $22,500                       plus $7,500 (for over 50)

IRA max.                                            $6,500                         plus $1,000

SEP-IRA max.                                    $66,000

The tax brackets at which rates increase have also gone up, so more is taxed at lower the brackets.

Inflation Reduction Act

The Inflation Reduction Act passed this summer and included changes to tax laws regarding energy saving credits.  The Act also contained other provisions, such as the 15% AMT for C corporations and 1% stock buyback tax.  It’s unfortunate that the abbreviation for the act is IRA, as we already have that in our tax lexicon. 

Beginning in 2023, this new law changes conditions for obtaining the $7,500 credit for new electric vehicles (EVs) and adds a $4,000 credit for used EVs (EVs that are 2 or more years old).  The Act also expanded the reporting requirements for the credits on your tax returns.  Finally, EV buyers can monetize the credit at purchase to reduce the sale price, rather than wait for their tax filing.  Remember there is also a credit for installing a home charger.

To obtain a credit for new EVs, the battery’s minerals must be extracted or processed in the US or a free-trade partner.  The battery must also be manufactured or assembled in North America.  Final assembly of the EV must be in North America.  There are price ceilings on EVs and income limits on claiming taxpayers. 

The Act extend and expanded home energy credits but also expanded the reporting requirements.

Tax planning

Start with this goal: to lessen the total tax due in 2022 and 2023 combined.  Usually that means delaying income to 2023 and accelerating deductions to 2022.  For 2022-2023, the jump in the standard deduction could mean losing itemized deductions in 2023, so pay special attention to what you can shift to 2022.  As we pointed out our post for 2021 year-end planning, if you are concerned about future tax rate increases, you can use a Roth Conversions to bring future income into 2022.

Now to the planning:  Can you act at all? 

Each year, we advise that you be practical, focusing on where you can actually make moves.  For many, the high standard deduction (which is even more for over age 65 taxpayers) means you will not itemize (i.e., your total for itemized deductions is less than the standard amount so you take the higher standard deduction).  And, if you are not itemizing, you have fewer ways in which to affect change in the taxes due in either year.  If you can itemize, you have more tools for planning. 

Tools – income

You can reduce taxable income by maximizing your retirement contributions with your employer via 401(k) or 403(b) plans and IRA contributions if you are below the thresholds.  If you are self-employed, you can contribute to your own qualified plan such as a SEP-IRA. 

You may also be able to contribute to a health savings or flex account.  Be sure to see to use any flex account balances before they expire. 

Review your investments to see if you can take losses to reduce capital gains and up to $3,000 of ordinary income.  ax loss harvesting reduces net taxable capital gains, but be sure not to run afoul of the wash-sale rule.

Tools – deductions

Review your unreimbursed medical expenses, which you can deduct if the total is over 7.5% of your adjusted gross income. 

State and local taxes are capped at $10,000, so you may not be able to shift much between years.  And it is difficult to accelerate mortgage interest on first and second homes.  

Often, the place for the most change is in charitable deductions, where you can bunch two- or three-years’ worth into a single year so you can itemize.  You can use a donor advised fund (“DAF”) to bunch, by contributing all in one year, then having the DAF send annual amounts.  Also, you can transfer up to $100,000 from a traditional IRA directly to charity if you are over 70½.  Note that Congress has not extended the $300 above the line charitable deduction. 

Before you finish, check withholdings and estimates paid

Especially if you increase income in 2022, 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.

And remember your estate plan review

As noted above, the federal gift and estate tax credit  is close to $12 million for 2022 and increases to $12.92 million in 2023.  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.  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. 

Summary

As you review your 2022-2023 tax planning, determine what you can shift and project the impact.  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 address the impact of inflation on tax thresholds for 2022 and 2023 that affect your year-end tax planning.  We also review the Inflation Reduction Act and EV credits.  As in the recent years, many taxpayers will not be itemizing because of higher standard deduction (rising to $27,700 for married couples in 2023), unless they bunch charitable deductions from two or more years into one year.