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Will it be a Big Beautiful Tax Law?

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The bill passed by the House is now before the Senate.  It meets President Trump’s campaign promise to make provisions of the 2017 Tax Cut and Jobs Act or “TCJA” permanent.  That law made substantial changes to tax rates, deductions and credits for individuals, corporations and other entities as well as including the qualified business income deduction or QBID.  We provide an abbreviated summary of the new bill at the bottom. 

However, the impact on the national debt from the reduced revenue due to the cuts has raised concerns with investors and led to downgrading the rating for Treasury bonds.  One estimate has a ten-year cost of $3 trillion, which could explain why the bill raises the debt ceiling by $4 trillion. 

Will this bill suffer the same fate as the Trump bill in 2017 to overturn the Affordable Care Act?  That bill had passed the House only to be thrashed to death in the Senate.  We will post updates when the Senate finishes with its version. 

What is the Impact of New Tax Law?

We have been reviewing the impact of the new law and this is not simplification! 

Here is one example: the increase in the deduction allowed for state and local tax or “SALT” to $40,000 could reduce taxes for many, if they can include more state and local taxes when they itemize.  But, the impact is blunted because the standard deduction also increased (you take the larger of the two).  Then the benefit of itemized deductions is reduced above a certain income level.  The above-the-line charitable deduction also reduces the impact of itemizing.   And increasing the SALT deduction could mean you owe the Alternative Minimum Tax or “AMT.”  In other words, you have to run tax projections to determine the best action. 

In previous posts, we have advised bunching of deductions into a single year so you can optimize itemizing.  That planning may be both more important and tougher to do.

Many new provisions that initially sound good involve complex qualifications that could mean few taxpayers use them.  For example, there are so many savings accounts to which this bill adds the Trump account and expands other provisions.  On the other hand, access to health savings accounts or HSAs for seniors could provide a new resource for planning. 

The expiration of electric vehicle credits and energy-efficient home credits may mean acting sooner on some purchases.  

Conclusion

We have to see what the final law looks like to know how best to respond. If you want us to review the impact on your taxes, please let me know.

In the meantime, please contact us if you have any questions and good luck!

Steven  

A Quick Summary:

The new law will keep tax rates and the AMT exemption the same. 

It increases the state and local tax or SALT limit to $40,000, but then cuts it back for income over $500,000. 

It extends the standard deduction from TCJA with a temporary increase to $32,000 for married filing joint taxpayers or “MFJ” for 2025-2028 and adds a $4,000 bonus standard deduction for taxpayers over 65, but this phases out over $150,000 for MFJ. 

There is no tax on qualified tip income or overtime if your income is below the cap. 

The electric vehicle or EV credit ends for some in 2025 and all the rest at the end of 2026 as does the credits for energy efficient homes by 12-31-2025.

The estate and gift tax credit rises to $15 million in 2026. 

You can deduct up to $10,000 of car loan interest, but with a phaseout for income over $200,000. 

You can contribute up to $5,000 per year into a new Trump account for a child until through age 18 which can then be used for education, business or a new home.  Qualified distributions are subject to capital gains tax while all others pay ordinary rates plus 10%. 

The new law restores the “above the line” deduction for up to $300 to a charity for married couples or $150 for all others. 

It temporarily increases the child credit from $2,000 to $2,500 through 2028, subject to the same phaseouts as the current law. 

There is a new credit not to exceed 10% of gross or $5,000 for contribution to scholarship granting institutions.

Adoption credits are expanded as are ABLE accounts.  Roll overs from tuition plans to ABLE accounts are allowed. 

Qualifications for tax-free distributions from 529 plans are expanded.

The QBID goes from 20 to 23%.      

Seniors receiving Medicare can contribute to health savings accounts or HSAs if they have a high-deductible health insurance plans.  This is a great way for tax sheltered growth to cover future bills.  The new law allows taxpayers and spouses to make catch-up contributions. 

Pass through entity tax deductions or “PTET” are only allowed for entities that are qualified businesses under Section 199A – the QBID provision.

There is an increase on tax on private foundations and college endowments.

Emergency planning – key documents, disaster relief and document recovery

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If you have not experienced a disaster, you probably know someone who has.  We have seen numerous posts that suggest steps to take to protect important information as well as ways to rescue or restore information.  The key is planning ahead so you are prepared.   

Therefore, I urge you to review your situation and consider whether you are prepared or need to do more.

You can start by identifying possible hazards and your vulnerability.  If you determine that you are at risk in any way, plan how to respond and recover.  Know your emergency communication options and consider training drills for your family.  The Red Cross has a site with steps for an emergency plan for you and your family.  And there are detailed plans listed by FEMA under planning guides which include risk management.  FEMA even has a preparedness app! 

If you are hit, you may be entitled to disaster relief – check the IRS Disaster Relief page..  The IRS also offers disaster loss workbooks in Publication 584, Casualty, Disaster and Theft Loss Workbook (Personal-Use Property), and Publication 584-B, Business Casualty, Disaster and Theft Loss Workbook. 

Amy Poulton suggests the five key documents to have readily available.  Here is a summary of her post:

1.  Identification Documents – keep these documents in a fireproof, waterproof container (that is her link to Amazon for ideas) or digital copies in a secure cloud storage to ensure they’re safe and easy to access during an emergency. 

2.  Insurance Policies and Emergency Contacts – have access to insurance cards and policies for home, car, health, and life insurance along with emergency contacts.

3.  Medical and Health Information – have current prescriptions, medical history, immunization records and medical directives and powers of attorney. 

4.  Financial Documents – have on hand your bank and credit cards, with access to your tax returns and retirement accounts.  You will also want a current list of key websites with log-in IDs and passwords – you may want to store this “in the cloud.”  

5.  Legal Documents – have copies of  your wills and trusts, deeds and rental agreements, marriage certificates and powers of attorney.  

Organizing and Storing Documents – create a digital folder, back up your documents and share with trusted people.  You can also place digital items on a flash drive to share. 

What if you are hit before preserving your records?  The IRS has a site to visit: Reconstructing Records. 

If you want to make sure you have food and water for a physical disaster, here is one guide to check out to build a kit.  The list includes emergency supplies. 

We all hope to be spared, but it is wise to organize your documents and have a plan in place in case you are not!

Let me know if you have more ideas and good luck!

Steven

Roths and Market Volatility – a chance to convert on dips

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We have written before on the advantages of a Roth IRA over the standard IRA and discussed strategies for converting IRAs to Roth IRAs.

One possible good side to market volatility is that with the swings in the value of stocks and mutual funds, you can try to convert an IRA to a Roth IRA at a low point, with the cash invested in a similar way so when the market returns, your portfolio swings back up while the taxable income at the time of conversion is lower. 

If it works, the tax cost of converting will be less. 

When reinvesting, you need to be aware of the wash sale rule, which is designed to prevent creating artificial losses for tax purposes without actually changing your investment position.  That is, it prevents realizing losses if you buy back the same or similar securities within 30 days. 

Why would that apply to IRAs?  If you only sell inside the IRA, it doesn’t. 

However, if you sell in a taxable account, and then buy the same or similar securities within 30 days inside an IRA, the IRS disallows the loss permanently (if it were in a taxable account, the loss would just be delayed). 

Let me know if you have any success with Roth conversions!

Steven

Holiday gift and tipping guide, 2024 update

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Dr. Maya Angelou – I have found that among its other benefits, giving liberates the soul of the giver.

Anne Frank – No one has ever become poor by giving.

In the United States, we tip for many services to the point that tipping may be an expected part of pay.  But for the holidays, we still use this as a time to say a special “thank you” to those who help get us and our families through each day and throughout the year.  And this should be “from the heart,” as a symbol of gratitude, rather than being obligatory and expected. 

When you tip, please be mindful that the message you intend may not always be obvious.  Your 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.  

Planning

Before you start giving anything, set a budget and make a list so you cover all you can without overextending yourself.  You may be able to use a cash app as well as giving cash.  Some use an “up to” method for guidance, as in “up to one session,” or “up to a week’s salary,” etc.

Like the holidays, this should be fun rather than stressful.  If you are sincere, people appreciate that you are doing what you can and often respond with the same cheer you demonstrated. 

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

If you had to call emergency services or had a great experience with someone else who is not allowed to receive a holiday tip, you can send letters of thanks directly to a local hospital, fire station or police department or send a meal or even 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 those you appreciate. 

“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 any cash gifts and can get gifts valued no 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 $15-$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 up to 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 during the year.

3.  Regular cleaning person – up to 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, up to 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 up to 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 – up to one lesson or 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.

Enjoy the season!

  • Steven

Year-end tax planning 2024 and impact of election on future tax changes

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This post is long and involves many issues, so use the headings to find the ones that fit your situation.

Tax planning overview – expect changes

First, impact of the new administration:  we have been cautioning that the sunset of the Tax Cut and Jobs Act (“TCJA”) provisions would mean a likely increase in taxes.  That now seems less likely as President-Elect Trump and the Republican Congress intend to make the TCJA rules permanent rather than let them expire after 2025 and revert to pre-2018 levels.  This change may not take effect until 2026, but it could tilt your planning toward taking deductions in 2024 and pushing income into 2025. 

The new administration is less favorable to environmental provisions in the Inflation Reduction Act.  EV credits may be reduced or go away.  If you are considering a purchase involving a tax credit, you may want to act before 2025.  Check to see if your anticipated purchases or improvements qualify and then retain the information needed to file for a credit. 

There are many other changes being aired.  These include increasing the child tax credit, reducing the tax rate on C corps., raising the SALT cap (see below) and imposing tariffs.  Any of these may affect your planning. 

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. 

You can also bunch some items from two or more years to be deducted all in one year, such as charitable donations.  If you don’t want the charity to have a large amount all at once, give to a donor-advised fund (“DAF”) for the deduction and then dole out from the DAF over time to the charity. 

Two-year goal: the goal is to reduce the total tax for the two years combined.  For example, while many may want to delay income, some may benefit from increasing 2024 income.  One way to increase income that we have discussed before is a Roth conversion – see below.

Retirement plans:  The age for required minimum distributions (RMDs) is now 73, so taxpayers turning 73 in 2024 have until April 1, 2025 to take their first RMD, calculated on your December 31, 2023, balance.  Tax planning on this is crucial, as taking the RMD before 2025 may result in a lower total tax for 2024 and 2025 as you have the 2025 RMD due in 2025.  If you wait, you have two RMDs in 2025, which 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 $105,000 in 2024 and $108,000 in 2025 counts for your RMD (but not to a DAF).  Also, you can make a one-time contribution to $53,000 to a charitable remainder annuity trust, charitable remainder unitrust or a charitable gift annuity. 

Audit risk:  the IRS had pledged to not increase audit rates for taxpayers earning under $400,000.  The 2018 audit rate, for their comparison, was under one percent overall.

Estates:  As noted in a prior post, the annual exclusion for gifting is now $18,000 and it will rise to $19,000 next year.  If you have plans to transfer wealth, keep this in mind. See more on estate planning below.     

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 to avoid interest and penalties. 

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, 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 may be able to contribute to a non-deductible IRA and then convert that IRA to a Roth IRA. 
  • Move income and deductions – Other ways to shift income include billing more in 2024 or delaying to 2025 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 2024.
  • Capital gains – You probably do not want to accelerate capital gains, as they may be taxed lower rates in future years.  You can utilize tax-loss harvesting to shelter gains already realized for 2024 by identifying any losses and realizing them in 2024.  If you want to buy back these securities, watch out for the wash-sale rules.  And be sure not to use assets with a loss for charitable donations or buy new funds just before dividend distributions!

On to other considerations

First, SALT deductions – The limit on state and local taxes, or SALT, has not increased yet, but increases may be addressed next year.  Review the SALT portion of your itemized deduction strategy if you are bunching. 

As we noted before, several 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. 

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, 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 2024, 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  rises to almost $14 million for 2025, and may go up further.  However, if the TCJA changes are not made permanent, it could fall back to approximately $7 million in 2026.  As noted above, the annual gift tax exclusion will increase to $19,000 next year. 

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.  If you are well below the credit level, you may want to focus on the step up in basis rather than estate tax avoidance.  See our post on using the step up in basis.  And 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 to trusts, etc.  See our post on asset ownership for more.
  • For Massachusetts residents, the exemption is now $2 million (as of January 1, 2023).  This may affect your portability planning on income and estate taxes in an estate – see our post on using the step up in basis for planning ideas.

Summary

As you review your 2024-2025 tax planning, consider the impact of future tax changes: will future income be taxed at a lower rate, will future deductions be lost, etc.?  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