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 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!
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!
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.
We face a challenging time for planning: The election resulted in a new President while the rate of Covid-19 infections (and deaths) continues to rise. This has affected the economy, resulted in some tax law changes and may yield more stimulus to restore the economy. Also, there may be more changes in 2021. This post is intended to help you make the best tax-efficient moves before 2021 begins.
2020 year-end tax planning – update on using the tax laws to save you money
In 2018, we provided a three-part series explaining the impact of the new tax law. In our first part, we discussed the impact of the new law on personal taxes and in our second part, we discussed planning for small businesses. This update replaces the third part from December 2018, as updated December in 2019 – it is our guide for year-end moves to reduce total taxes between 2020 and 2021. But, before getting to the planning steps, we address the uncertainty caused by possible tax changes in 2021 and review some recent changes from earlier this year.
Possible Tax Law Changes under Biden
President-Elect Biden campaigned on raising taxes for corporations and for individuals making over $400,000 of income. However, even if the Senate seats in Georgia go to Democrats in January, the lack of a “Blue Wave,” a sweeping Democratic mandate, means that the tax hikes are unlikely to pass. Furthermore, the President-Elect has made clear that controlling Covid-19 and economic recovery are the top priorities of his new administration.
What did President-Elect Biden propose? He would restore the 39.6% bracket for couples making $622,050 or more ($518,400 for singles), add a 12.4% social security tax for income over $400,000, place a 28% limit on itemized deductions for high income taxpayers, restore the 20% long-term capital gains rate for high income returns (and even apply ordinary rates on gains of taxpayers over $1 million), and limit the Qualified Business Income Deduction and opportunity zone credits. For estate taxes, he would reduce the current $11.58 million exemption to a lower amount, perhaps $5 million or even $3.5 million, and eliminate the step-up in basis at death.
While none of these changes are likely, there may be narrow tax hikes to fund infrastructure building and small tax breaks for lower earners (child/dependent care and elderly long-term care credits). There may also be more stimulus action, such as more Paycheck Protection Program loans and business tax breaks for worker safety measures, as well as retirement savings incentives, tax extenders for items expiring this year, and tax breaks to encourage US manufacturing. We will monitor activity on these matters for comment in future posts.
Changes from the SECURE and CARES Acts for 2020
We wrote about the CARES act earlier this year, which waived the 10% penalty for coronavirus-related distributions from qualified plans of up to $100,000, with three years to pay the taxes due or redeposit as a roll-over, and suspension of required minimum distributions (“RMDs”). The act also allows larger plan loans.
The Secure Act delayed RMDs to age 72 and allowed individuals to contribute to IRAs after age 70 ½ if still working. But the Act also limited the distribution of IRAs to a 10-year maximum for beneficiaries other than spouses and certain others, thus eliminating the “stretch IRA.”
The Families First Act created credits for people unable to work due to Covid-19 illness and due to caring for others. If you are affected, check to see if you are eligible for any of these tax credits.
A reminder on the mortgage interest deductions
As you may recall, mortgage interest on new home purchases is deductible only for loans of up to $750,000 used to purchase your primary and secondary residences. Interest on home equity loans is not deductible, except when the home equity indebtedness is used to purchase or improve your primary or secondary residence.
Check taxes already paid
Make sure your total paid to the IRS and state via withholdings and estimates meets the safe harbor rules. If not, you could owe interest for under-withholding.
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 $24,800 standard deduction for married couples (more for over 65 taxpayers, and $12,400 for single 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 (but you can also stop collecting receipts for those deductions).
There is one exception from the CARES Act, which provides a $300 above the line charitable deduction for cash contributions. You get this regardless of itemizing.
Some possible deduction strategies
One technique for getting around the limit on deductions is to bunch certain deductions from two or more years into one year. However, the only deduction that you can easily move is for charitable donations, because your state, local and real estate taxes are limited to a $10,000 maximum and you cannot accelerate, or delay, significant amounts of mortgage interest.
If you do not want any one charity to receive the full amount in one year, you can still use this bunching strategy to donate to a donor advised fund, from which you may be able to designate donations to particular charities in future years.
The tax planning steps
What can you move? If you are able to itemize, determine what income and deductions you can move from 2020 to 2021 or vice versa. You want to minimize total taxes for both years. Make sure your planning includes the 3.8% Medicare tax on high income and a review Roth conversion. Roth distributions are not taxed, so converting a traditional or roll-over IRA to a Roth could be beneficial, as long as the tax cost now is not too great – see more at Roth or not to Roth? With the waiver of the 10% penalty for early withdrawals, a Roth conversion may be more attractive. Business owners will want to review our post on planning under 199A for QBID.
What is the effect of moving? Next, review the impact of moving income and expense to see what happens if you shift any of these amounts from one year to the other year.
The AMT – Finally, watch for the Alternative Minimum Tax (“AMT”). The AMT affects fewer people, but it is still wise to review so you avoid it.
Retirement contributions
If you have not maxed-out your 401(k) plan, IRA, Health Savings Account or flex plan account, consider doing so before the end of the year. The contributions reduce your tax able income while adding to savings. But check out our post on paying debts vs. investing.
If you are 70½ or older, you have the option of distributing up to $100,000 from your IRA or other qualified plan to an IRS-approved charity and having none of the distribution taxed. The provision was great when you had an RMD to satisfy, but that was suspended for 2020. That should not stop you if you still have the charitable intent.
Business expenses
The deduction of unreimbursed business expenses was terminated by the new tax law. That hurts many who are working from home this year, as they cannot deduct associated costs.
We wrote about forming an LLC or S Corp. to report business expenses or taking expenses on Schedule C in our 2018 Part III post, but that applies to expenses for that business and we stressed that you will need a valid business purpose to form the LLC or S Corp. or use Schedule C for self-employment and take expenses. Be sure to consult with an attorney before trying any of these ideas.
Capital gains
Review your unrealized losses to see if you can “harvest” those losses to offset or “shelter” realized gains, reducing your total taxable income. If you have more losses than gains, you can take up to $3,000 of capital losses against other income.
If you sell an asset that you would prefer to retain, in order to shelter gains in 2020, make sure you do not run afoul of the wash-sale rule (any loss on an asset that you repurchase in 30 days will be disallowed, so you have to either wait 30 days or purchase a similar asset that fits your portfolio while not counting against the wash sale rule). N.B. – when buying mutual funds late in the year, check for distribution dates so you do not purchase just before dividend and capital gains distributions, as you will owe taxes on those distributions.
If you have significant unrealized gains, consider using appreciated stock for charitable donations – that way you avoid the tax on the gain while still getting the full fair market value for your charitable donation. That is very effective tax leverage!
Estate plan review
While you review your taxes, review your estate plan as well. The federal exemption is over $11 million in 2020, so fewer people will owe any federal estate tax. However, that may change in 2021; also, many states still impose estate taxes on smaller estates.
The individual gift and estate tax exemption is due to return to $5 million, adjusted for inflation, in 2026 and could be lowered sooner, as noted above. That tax rate could also go up.
If you have “excess wealth” and want to reduce your taxable estate by gifting assets to children or others, you can give $15,000 per person, per year now. If your spouse joins you, that is $30,000 per person. This includes funding a 529 plan for education cost – expanded to provide for more than just college – or an ABLE account for disabled dependents. Note, however, that holding appreciated assets for the step up in basis at death may be better than gifting, but this could be eliminated as noted above.
If you do review your estate plan documents, also review beneficiary designations to make sure everything is current. And review your medical directive and durable power of attorney.
Summary
Carefully review any income and deductions that you can still shift to see if moving will lessen the total taxes you pay for 2020 and 2021.
Good luck and best wishes for happy and healthy holidays!