Tag Archives: Roth conversions

Mid-year planning for SECURE Act 2.0 and inflation impact

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Mid-Year planning   

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. 

We encourage you again to consider converting, 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.  

Coordinate with investing and estate planning

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. 

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

Tax planning while laws are still changing – turn it on its head?

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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!

Year-end tax planning – how to minimize the total tax paid in 2014 and 2015

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This year, when projecting your potential taxes, you have to factor in the changes from 2013 that affect 2014 and 2015, which can be daunting. That is:

  • You have the standard plan: “defer income/accelerate deductions unless you are in the alternative minimum tax (“AMT”)” (see below).
  • But then you also have the new 3.8% surtax, with rules that do not play well with the others!
  • Finally, the tax rates changed again for 2014 (see the table below).

If any of this is not clear, please ask questions.

Can you act?
To make your review of 2014 planning less daunting, take these separate steps: (1) ask “can you act?” – determine what you can do reviewing the “what can you act on” list below; then (2), if you can act on any of the items in 2014 or 2015 – moving from one year to the other, or delaying further – then ask “what impact does your acting have?” ; and finally, ask “what happens if I take all of these actions?” – determine the impact of all possible moves in concert, especially vis a vis the AMT. Preparing tax projections for both years is the best way to find out how to act most effectively to reduce taxes. It permits you to see which moves have the best results in which years, so that the total tax paid in the two years is minimized.

What can you act on?
Wages – Can you defer or accelerate between years or even convert income into deferred income, such as stock options, or income to be received at retirement? Can you convert compensation into tax-free fringes?

AMT – the AMT is the 28% flat rate calculated differently than the marginal rate of up to 39.6%. If your deductions bring the regular tax down too low, the AMT kicks in, so that the deductions are wasted and need to be moved to another year, if possible. Otherwise, you will want to increase income for that year to “pull yourself out of the AMT.” The AMT exemptions amounts for 2014 are $52,800 for individuals and $82,100 for married couples filing jointly.

The 3.8% Medicare surtax – This affects all income for 2014 and beyond, but only to the extent of the lesser of (a) net investment income or (b) the excess of modified adjusted gross income (“AGI”) over the threshold, which is $250,000 ($200,000 for single taxpayers). Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income but excludes pensions and IRA distributions. The 3.8% surtax must be covered with your withholdings and estimated payments to avoid penalties and interest. See our post at Update on the impact of the 3.8% Medicare surtax .

Standard Deduction – up in 2014 to $6,200 for single taxpayers and married taxpayers filing separately, $12,400 for married couples filing jointly, and $9,100 for heads of household.

Schedule A itemized deductions – can you shift income and deductions for the maximum benefit, given the income-based deduction thresholds?

  • //Miscellaneous// – only the amount above 2% is allowed on Schedule A. Miscellaneous expenses include items such as unreimbursed employee expenses, tax preparation fees and investment-related expenses.
  • //Other Deductions// – certain itemized deductions are phased out once your AGI exceeds $305,050 for married filing jointly ($254,200 for singles), so that your itemized deductions are reduced by 3%, on up to 80% of the deduction, for the excess of your AGI above $305,050 ($254,200 for single filers).

N.B. – (a) many of the deductions affected by the phase-out are the ones not allowed in the AMT calculation and (b) investment interest is not subject to reduction on Schedule A.

Schedule C income and expenses – can you defer or accelerate between years so that the net income falls in the best year?

Investment income – can you shift interest, dividends, and capital gains? The tax rate on capital gains was as low as 0% in 2013, with a cap at 15%. However, that cap went up to 20% in 2014 for AGI over $457,600, for married filing jointly ($406,750 for single; $12,150 for trusts and estates). You net losses against gains, with up to $3,000 of an excess loss over gains being allowed to shelter other income and losses you do not use carry to the next year.

Notes

  • (a) capital gains include the sale of a primary residence (above the $250,000 per owner shelter);
  • (b) if you sell to recognize a loss, and want to hold the stock again, be aware of the wash sale rule which bars recognition of the loss if you re-purchase substantially the same security within 30 days, even if it is in different accounts you own, including repurchasing in your IRA;
  • (c) an installment sale that spreads gain over several years; a like-kind exchanges involve investment property, which means you can swap, rent and later convert to residential; and
  • (d) purchasing mutual funds late in the year can lead to dividend and capital gains distributions where the mutual fund price changes but your investment does not, such that you have no economic gain for the distribution on which you pay taxes – you are effectively pre-paying taxes because you did not purchase after the declared distribution date.

Investment income also includes passive income and losses (rental property, limited partnerships and LLCs). If you can re-characterize any activities as material participation rather than passive by grouping together to meet the material participation rules, you have a one-time election to regroup (see final regulations on when and how you elect issued early in 2014).

Roth conversions – can you convert an IRA to a Roth IRA, so that future distributions are not subject to tax? Be sure to pay the tax with funds outside of the IRA so that the conversion has maximum benefit.

Stock options – can you exercise a non-qualified option (“NQ”), which is treated as ordinary income, or instead exercise ISOs, which can be investment income (but create an AMT)? Disqualifying an ISO converts it into a NQ, so that you have control over the type and timing of the income.

Required minimum distributions (“RMD”) – If you turned age 70½ in 2014, you can take a distribution in 2014 instead of next year to decrease your 2015 income – but the IRA distribution is not subject to the surtax so this would be done for the Schedule A phase outs (see below).
A direct distribution from an IRA to a charity allows you to give up to $100,000 (per person) of your RMD and lower your AGI for purposes of determining taxes.

Estate taxes – Federal Estate Tax Exemption for estates of decedents who die in 2014 is $5,340,000, up from $5,250,000 for 2013.

Gifting – can you shift assets by gifting within the $14,000 per year/per person annual gift tax exclusion, or even by filing a gift tax return to use some of your unified credit now, so that income is in the lower tax bracket of new owner? You may want to combine this estate tax savings strategy with income tax savings ideas so that you shift an income-producing asset to someone in a lower tax bracket.

Inherited IRA – be sure to divide an inherited IRA among beneficiaries to get the maximum life expectancy for RMD calculations for each.

If you made it this far, I hope you have a good idea of your 2014-2015 tax plan, or else a set of questions to ask so we can help devise one for you! //Please contact us//.

Federal Tax Rates for 2014:
[[image:2014-federal-tax-rates.jpg|large|link=source]][[file:2014-federal-tax-rates.pdf]]