Tag Archives: Roth conversions

Year-end tax planning 2025

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This post is long and involves many issues, not all of which will apply to you, so use the headings to find the ones that fit your situation. 

Tax planning overview – know the changes and know how to respond

First, impact of the new tax law:  the One Big Beautiful Bill (“OBBB”) made many of the Tax Cut and Jobs Act (“TCJA”) changes permanent while ending energy credits, allowing for deduction of some tips and overtime, and adding new accounts.  See our post on the new law for more on the new law.  Along with the new law, the Administration is banning the Treasury from sending or receiving checks (see below).  If you have not set up an online account with the IRS, please consider doing so. 

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 an escrow with 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. 

Third – your 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 2025 income.  One way to increase income that we have discussed before is a Roth conversion – see below.

Review the tax changes

Some changes require no planning or response from you:  OBBB locked in tax rates, increased the standard deduction and child credit, and allowed more for child care.

Others require planning:  The SALT limit went from $10,000 to $40,000.  Seniors get a $6,000 deduction to offset taxes on social security.  A deduction is allowed for tips and overtime for some workers.  Up to $10,000 of interest on new auto, SUV, truck and motorcycle loans can be deducted if you have US final assembly. 

Clean-energy credits for EVs have ended and will end for residences. 

High income itemizes have to address the stealth tax again – the deductions are limited to the 35% rate (rather than allow the full 37%).

Next year:  new for 2026, there is an above-the-line charitable deduction up to $1,000 per person.  However, itemizers can deduct only to the extent the donations exceed .5% of income.  And donations to qualifying scholarship organizations receive a tax credit up to $1,700. 

The employer provided account for dependent care increases from $5,000 to $7,500.

OBBB implementation – with IRS cutbacks and government shutdown, the full implementation of the changes for 2025 filing will delay forms and filing.  For example, providing for the tip and overtime deductions requires revamping form 1040 with new Schedule 1-A. 

Strategic considerations

SALT deductions:  The limit on state and local taxes, or SALT, has increased but so has the standard deduction, making planning for bunching deductions complicated when you review the SALT portion of your itemized deduction strategy.  Bunching real estate tax or estimated payments may help max your SALT deduction.  

Retirement plans:  The age for required minimum distributions (RMDs) is now 73, so taxpayers turning 73 in 2025 have until April 1, 2026 to take their first RMD, calculated on your December 31, 2024, balance.  Tax planning on this is crucial, as taking the RMD before 2026 may result in a lower total tax for 2025 and 2026 as you have the 2026 RMD due in 2026.  If you wait, you have two RMDs in 2026, 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 $108,000 in 2025 and expected to be $115,000 in 2026 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. 

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

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 2025 or delaying to 2026 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 2025.
  • 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 2025 by identifying any losses and realizing them in 2025.  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!

More considerations – 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.

  • Note: the reduction in funding for the IRS is predicted to result in delays in processing refunds and paper returns and is expected to encourage more fraud.   

No more payments or refunds by check – the IRS announced this:

Executive order prohibiting the U.S. Treasury Department (Treasury) from accepting paper checks as tax payments or issuing checks for tax refunds … The E.O. also requires that all payments to the federal government (e.g., taxes, fees, fines, and loan repayments) be processed electronically as soon as practicable.

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 2025, 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.

And remember your estate plan

While you review your taxes, review your estate plan as well.  The federal gift and estate tax credit  rises to $15 million for 2026, and may go up further.  As noted above, the annual gift tax exclusion will remains at $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.  However, 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.
  • Step up – 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.
  • Disaster planning – with the impact of climate change, we are experiencing more disasters.  And with cutbacks to weather forecasting and FEMA, more of us may be affected.  We offer some ideas to make sure you are prepared. 
  • Beyond basic planning – a good estate plan goes beyond signed documents and provides the information for survivors so that they know your wishes, where to find everything and who you want to receive it.  Give them clear instructions; you don’t leave them with a mess!  Here is our guide to writing a memorandum that goes well beyond just signing documents; it covers the items your survivors will have to address. 

Summary

As you review your 2025-2026 tax planning, consider the impact of the tax changes, 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 

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

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 

A collection of thoughts and links for 2023 tax prep season

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Tax Season Tips and Links

As we gear up for tax season, here is a collection of thoughts and suggestions:

As noted previously, the TCJA expires after 2025, so we encourage planning for all those changes.  For some ideas, see our post on turn tax planning on its head for income taxes and see this post on estate planning.

When you work on your IRS form 1040 for 2023, how do you plan to answer the question on digital assets?  That question has changed over the years and now reads:

At any time during 2023, did you:  (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)? 

2023 form 1040

Some tax pros think this question covers items such as a ticket for events like the Super Bowl, as these are non-fungible tokens, or NFTs, being unique and recorded in digital ledgers.  Therefore, if you purchased such an NFT, you need to answer “yes.”  When in doubt, saying yes may be the best response.

We reported that the SECURE Act 2.0 allows for unused 529 plan contributions to go into a Roth IRAs.  Here is a planning suggestion for parents and grandparents:  start early with 529 plan contributions so that there is a surplus over college costs that can be converted to a Roth later, within the limits.  

There are also some significant cases before the Supreme Court we are watching, including the Moore case on unrealized income.  

The IRS continues to deal with a huge backlog of mail to process, including many amended returns.  They say that this is due to prioritizing answering calls over processing during the Pandemic.

And the IRS warns again to be wary of phishing attempts by phone, e-mail and text.  They have a page on phishing and how to respond.

Massachusetts changed the estate tax law so we now have a true exemption of $2 million.  This may tilt more toward planning to avoid capital gains rather than estate taxes.  

For more ideas, please see “Year-end Tax Planning 2023-2024 and recent changes” to read more and let us know if you want to discuss any of the strategies. 

Let me know if you want to discuss anything. 

Thank you and be well.

Steven

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