Dear Clients and Friends:

We have compiled a list of some available actions based on current tax rules that may help you save tax dollars if you act before year-end. This list provides a few suggestions, but based on your unique circumstances, there may be many additional planning opportunities to consider.  We can narrow down the specific actions that can benefit you once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience.

Planning for Tax Rate Increases

For 2023 there are seven tax brackets starting at 10% and topping at 37%.  The top bracket starts at a higher income level of $693,750 for individuals filing joint returns.  Please note that the top rate will revert back to the maximum 39.6% starting in 2026. With these lower rates, it may be appropriate to recognize deferred income before rates increase in the future.

Itemized Deductions

The Tax Cuts and Jobs Acts made multiple changes to the most common itemized deductions that will change the tax strategies for many taxpayers.

  • With the standard deduction for 2023 at $27,700 for married individuals, $13,850, for single or married filing separately, and $20,800 for Head of Household, the bunching strategy becomes more effective.  You may be able to save taxes this year by applying a bunching strategy to itemized deductions such as charitable donations, medical expenses, and other itemized deductions.
  • Make charitable donations with appreciated stock owned more than one year. The fair market value is used to measure the donation, and there is no tax on the difference between your cost and the fair market value. (If the fair market value is less than your cost, consider selling the investment to recognize the loss and contribute the cash proceeds). Remember that charitable contributions must be substantiated with a confirmation from the recipient.
  • For clients age 73 or more,  consider making charitable donations directly from their IRA to avoid tax on the distribution.  The transfer to the charity must be completed before December 31, 2023.
  • Under the Tax Cuts and Jobs Acts, a taxpayer may treat no more than $750,000 as acquisition indebtedness.  This new lower limit does not apply to home purchased before December 15, 2017.
  • The Itemized deduction for state and local taxes, including real estate taxes, is limited to $10,000.  Prepaying state taxes may not provide any benefit.
  • All 2% miscellaneous deductions have been repealed further reducing the available itemized deductions.

Retirement

  • If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you may wind up paying a higher tax than is necessary. You can back out of the transaction by re-characterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
  • If you are self-employed consider setting up a self-employed retirement plan.
  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2023 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2023. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2023, but the withheld tax will be applied pro rata over the full 2023 tax year to reduce previous underpayments of estimated tax.
  • Most retirement arrangements (other than Roth IRAs) require that participants begin to take annual payments benefits in the year the participants turns age 73 , referred to as Required Minimum Distributions.  While distributions generally must be made at the end of the calendar year, distributions for the first year can be delayed until April 1 of the succeeding year.

Other Planning Opportunities

  • If you have sold investments at a gain during the year, you may benefit from selling under-performing investments at a loss to offset the gain.
  • If you own an interest in a partnership or S corporation that is in a loss situation for 2023, you may need to increase your basis in the entity by loaning or contributing cash into the business so you can deduct losses in the current year.
  • If your itemized state and local tax deduction is subject to the $10,000 limitation, consider having your partnership or S corporation make a state tax payment on your behalf.
  • Section 199A may allow noncorporate taxpayers to deduct up to 20 percent of domestic qualified business income from a partnership, S corporation, or sole proprietorship.  Limitations may apply based on wages paid, or wages paid plus a capital element, certain trades or businesses, and taxable income.
  • Net operating losses may only offset 80 percent of taxable income.  There is also an “excess business loss” that may limit the amount of other income that can be offset by business losses.
  • Consider purchasing property that qualifies for bonus depreciation. Unless congress passes a law revising the current rules, the bonus depreciation deduction percentage is limited to 80% in 2023, 60% 2024, 40%  2025, 20% 2026, and 0% 2027.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you become eligible to make health savings account (HSA) contributions on December 1 of this year, you can make a full year’s worth of deductible HSA contributions for 2023.  The contribution limit for 2023 is $3,850 for self-only, and $7,750 for family coverage.  For clients age 55-65 there is an additional $1,000 catch-up.
  • If you pay for deductible expenses using a credit card before the end of 2023, it will be deductible in 2023 even if you pay the credit card bill after the end of the year.  The threshold for deducting medical expense is set at 7.5 percent of adjusted gross income.
  • The Tax Cuts and Jobs has placed a limit on withdrawals from 529 plans.  Plan participants may withdraw no more than $10,000 for qualified education expenses for children between K-12.  For higher education expenses, the withdrawal is limited to qualified education expenses. Any excess distributions received by the individual are treated as distributions subject to tax under the general rules of section 529.
  • The child credit remains at $2,000. The credit is phased out for joint filers when adjusted gross income exceeds $400,000.
  • Clean Vehicle Tax Credit: If you purchase a new plug-in (EV) or fuel cell vehicle (FCV) in 2023 or after, you may qualify for a clean vehicle tax credit of up to $7,500.

Net Investment Income Tax

Higher-income-earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII): including interest, dividends, capital gains and passive income, or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and net investment income (NII) for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed.

Gift And Estate

The Tax Cuts and Jobs Acts doubles the basic exclusion amount for federal estate and gifts taxes and the exemption amount for generation-skipping transfers (GST) Tax.  The 2023 federal estate and gift tax limit is set at $12,920,000.  Under current law, these higher limits are set to expire in 2025.  It may be tax effective to make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $17,000 in 2023 to each of an unlimited number of individuals but you cannot carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

You can also consider setting up a Charitable Remainder Trust.  This can allow you to liquidate securities, receive a charitable contribution deduction and postpone the recognition of income over a longer period of time.  Please contact our office for more details.

Conclusion

This list highlights some of the many planning strategies that can be implemented to save taxes. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. Effective tax planning requires a long-term strategy, with frequent reviews and adjustments along the way. A tax plan catered to your specific situation has the potential to save you significant tax dollars, so please contact us today to set-up a year-end tax review.