Category Archives: Tax Laws

Will it be a Big Beautiful Tax Law?

Posted on by

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.

Roths and Market Volatility – a chance to convert on dips

Posted on by

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

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

Posted on by

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 

Year-end Tax Planning 2023-2024 and recent changes

Posted on by

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

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

Posted on by

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