Category Archives: Financial Planning

Year-end Tax Planning 2023-2024 and recent changes

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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

Should your estate plan try to avoid income taxes rather than avoid estate taxes?

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With the federal gift and estate tax exemption nearing $13 million, a married couple can have close to $26 million in their estates before any federal estate tax would be due.  That leaves only a small percentage of people in the US who actually need estate plans focused on avoiding estate taxes.  Those who are comfortably below the threshold can instead focus their plans on reducing income taxes.

Estates get a step up in basis at death, so that assets do not pay both estate and income taxes.  For example, the house owned by a couple often has a low basis, so taxes will be due on sale.  When they die, they get a step up in basis, eliminating that gain and the corresponding income tax that would be due at death. 

To illustrate, here’s an example:  a married couple own a house worth $2 million for which they paid $500,000, they have $2 million in retirement accounts and $5 million in broker accounts.  Their combined estate of $9 million is well below the federal exemption of nearly $13 million per person, so no federal estate taxes will be due.  They have $1.5 million of gain if they sell the house, of which $1 million would be taxed after applying the $500,000 exclusion on the sale of a principal residence. 

If they have the standard estate plan, they will have revocable trusts that use the state and federal estate tax credits at both the first and second deaths.  If proper elections are made, no estate taxes will be due at the first death and no federal estate taxes at the second death.  They will also get the step up in basis. 

But what if one spouse dies many years later?  The half with the step up at the earlier death could now be subject to taxes on gain when the heirs direct the estate or trusts to sell.  If the house is then worth $4 million, the half in the trust of the first to die has new gain of $1 million on which income taxes will be due. 

If instead of having half the house counted at the first death, what if it is treated as passing to the survivor?  Then there is a full step up at the second death, with no gain.  And they have not traded capital gains for estate taxes.  While assets are counted in the second estate, rather than using the exemption at the first death, the first estate can make proper use of the deceased spouse’s unused exemption or “DSUE.”  Since 2012, federal law allows any portion of the gift and estate tax credit not used in the first estate tax filing to be carried to the second spouse’s death or “ported,” if the proper election is made.  This “portability election” for the DSUE is made on the estate tax return. 

But what happens when the federal credit drops back down in 2026 to the old amount as scheduled, which, after adjusting for inflation, is expected to be around $7 million?  The estates for the couple in our example still avoid federal estate taxes, using the DSUE of up to $7 million from the first death and the $7 million credit at the second death.  

Planning for state estate taxes may be necessary (for Massachusetts residents, the trusts can be used to shelter $1 million, the maximum credit).  And you may want to use trusts to control who gets access to the estates and when.  Also, you may need to plan for the generation skipping transfer tax or “GST” tax, which requires use of trusts and proper elections at death. 

If your net worth is enough to need estate planning but you do not expect to owe federal estate taxes, then your plan can address avoiding capital gains and use the DSUE to ensure that estate taxes are still avoided.  

  • Note that Massachusetts increased the estate the exemption from $1 million to $2 million as of January 1, 2023.  This may affect your planning. 

Let me know if you would like to discuss this.

Steven

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

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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

Year-end Tax Planning 2022-2023 and Inflation

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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.

Mid-Year planning – Rates, Roths and Rules

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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. 

If you want more on this decision, 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.  

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. 

Let us know if you have any questions. 

Good luck