Tax Considerations for 2023 Year-end and 2024 Tax Planning
With the 2023 tax year ending, making time to consider what last-minute tax moves you can make to reduce your taxable income and tax bill come filing season is important. To meet this challenge, you first need to be aware of relevant tax law changes going into effect. For example, The Inflation Reduction Act (IRA) was signed into law in 2022, introducing new and enhanced tax credits related to renewable and clean energy efforts that you might be eligible to claim. The SECURE 2.0 Act was also rolled out in 2022 and included significant provisions related to the tax treatment of retirement plans, of which some of the most important changes take effect in 2023. It is also important to remember that some tax opportunities in 2023 may go away by December 31, 2025, when the 2017 Tax Cut and Jobs Act (TCJA) is set to expire. So be sure to take advantage of those tax breaks while they are still available.
Keep reading for last-minute tax moves for 2023 and considerations for tax planning in 2024.
Tax Planning for Individuals
Income & Deductions
- Review investment portfolio – Consider selling certain investments that are not expected to rebound and will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 of net capital losses that can offset other income. Any remaining unused capital losses can be carried into future years indefinitely.
However, be wary of the Wash Sale Rule – which prevents you from taking a loss on a security if you buy a substantially identical security within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.
- Retirement Plan Contributions – Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs).
- The maximum amount of elective contributions that an employee can make in 2023 to a 401(k) or 403(b) plan is $22,500 ($30,000 if age 50 or over and the plan allows “catch up” contributions). For 2024, these limits are $23,000 and $30,500, respectively.
- The SECURE Act permits a penalty-free withdrawal of up to $5,000 from traditional IRAs and qualified retirement plans for qualifying expenses related to the birth or adoption of a child after December 31, 2019. The $5,000 distribution limit is per individual, so a married couple could each receive $5,000.
- Under the SECURE Act, individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.
- Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA.
Small businesses can contribute the lesser of (i) 25% of employees’ salaries or (ii) an annual maximum set by the IRS each year to a Simplified Employee Pension (SEP) plan by the extended due date of the employer’s federal income tax return for the year that the contribution is made. The maximum SEP contribution for 2023 is $66,000. The maximum SEP contribution for 2024 is $69,000. The calculation of the 25% limit for self-employed individuals is based on net self-employment income, which is calculated after the reduction in income from the SEP contribution (as well as for other things, such as self-employment taxes).
- Health Savings Account (HSA) – If you’re covered by a qualified high-deductible health plan, you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,850 for self-only coverage and $7,750 for family coverage (plus $1,000 if you’re age 55 or older) for 2023. HSAs can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
- Flexible Spending Account (FSA) – You can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer determined limit — not to exceed $3,050 in 2023. The plan pays or reimburses you for qualified medical expenses. (If you have an HSA, your FSA is limited to funding certain permitted expenses.) What you don’t use by the plan year’s end, you generally lose — though your plan might give you a 2 ½ -month grace period to incur expenses to use up the previous year’s contribution. Or it might allow you to roll over up to $610 to 2024.
- Contribute to a 529 plan – Although contributions aren’t deductible for federal purposes, some states (including Kansas and Missouri) offer tax breaks for contributing and any growth is tax-deferred. You are allowed to front-load five years’ worth of annual gift tax exclusions and make up to an $85,000 contribution ($170,000 if married) per beneficiary in 2023
Currently the only option when 529 beneficiaries don’t use up the entirety of 529 plan funds is to either to rollover the funds to another beneficiaries 529 plan or make a nonqualified withdrawal. However, a new option will be available starting in 2024; Up to $35,000 in unused 529 plan funds will be able to be rolled into a Roth IRA for the beneficiary (various rules apply to be eligible for this option).
- Required Minimum Distributions (RMDs) – The SECURE 2.0 Act raised the age taxpayers that are required to begin taking annual required minimum distributions from their IRAs to 73 and lowered the penalty for failing to take full RMDs from 50% to 25% beginning in 2023. If you are required to make an RMD, put in the request for your 2023 RMD now if you have not already. Many investment firms have a backlog from every client waiting until the end of the year to make the distribution.
The SECURE Act generally requires that designated beneficiaries of persons who died after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.
Under proposed Treasury Regulations (issued February 2022) that address required minimum distributions from inherited retirement plans of persons who died after December 31, 2019, and after their required beginning date, designated and non-designated beneficiaries will be required to take annual distributions, whether subject to a ten-year period or otherwise.
- Options to increase itemized deductions:
Property tax deductions – Under the TCJA, through 2023, the property tax deduction is subject to a $10,000 limit ($5,000 for married individuals filing separately) on combined deductions for state and local taxes. The limitation applies to taxable years beginning on or after December 31, 2017, and before January 1, 2026. If you find you are under the $10k cap, consider paying your property tax bills due in January 2024 in December 2023. Various states have enacted new rules that allow owners of pass-through entities to avoid the SALT deduction limitation in certain cases.
Mortgage interest deduction – You generally can deduct interest paid during the year on mortgage debt for your principal residence and second residence. Consider making your mortgage payment due in January 2024 in December 2023 to be able to deduct an extra month of interest.
Charitable donations – lump multiple years of charitable gifts into one payment. (Contributions to a donor-advised fund are a great way to use this technique.) Also consider donating appreciated publicly traded securities you’ve held for more than one year as you can deduct the current fair market value and avoid any capital gains tax (generally limited to 30% of AGI), or, if you are 70 ½ or older, making a Qualified Charitable Distribution (QCD) directly from your IRA as it isn’t included in taxable income and can be used to satisfy an IRA owner’s required minimum distributions (RMDs).
Cash contributions made to qualifying charitable organizations, including donor advised funds, in 2023 and 2024 will be subject to a 60% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for contributions to non-operating private foundations. Tax planning around charitable contributions may include:
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- Creating and funding a private foundation, donor advised fund, or charitable remainder trust.
- Donating appreciated property to a qualified charity to avoid long-term capital gains tax.
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Also, keep in mind that if you are donating items of more than $500,000 in value must file a qualified appraisal with Form 8283. Filing without the correct documentation can forfeit the tax benefits of the donation.
Medical expenses – If you find that you’re above or near the 7.5% adjusted gross income threshold for deducting medical expenses, consider whether there are any medical services and purchases you’ve been putting off and could bunch into the current year to maximize this deduction. (Deductible medical expenses include out-of-pocket payments for health / long-term care premiums, medical and dental services, and prescription drugs. Also, mileage driven for health care purposes can be deducted at 22 cents per mile driven in 2023.)
Estate Planning
- Annual gift tax exclusion – Consider reducing future estate taxes by providing gifts to family tax-free each year. The current limit is $17,000 per person and for 2024 is $18,000. That doubles to $33,000 if you are married ($36,000 in 2024). For 2023, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,920,000 per person. For 2024, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $13,610,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2023 and 2024, only the first $175,000 and $185,000, respectively, of gifts to a non-U.S. citizen spouse is excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:
- Making annual exclusion gifts.
- Making larger gifts to the next generation, either outright or in trust.
- Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).
- Pay tuition and medical expenses – Reduce the size of your estate by paying tuition for your kids or grandkids or paying the medical expenses for a family member. When payments are made directly to the provider (school or hospital), the monies are not taxable and are not included in the maximum gift tax exclusion amount noted above.
Estimated Tax Payments and Wwithholding
To avoid penalties, taxpayers must make estimated tax payments throughout the year equal to or greater than 90% of their projected 2023 tax liability or 100% of their 2022 tax liability (110% if making more than $150,000). If you determine you’ve underpaid, consider increasing your remaining tax withholdings from your salary or year-end bonus. Withholding is often a better tax strategy than making an increased quarterly tax payment since it is considered to have been paid ratably throughout the year and therefore doesn’t leave you exposed to penalties for earlier quarterly underpayments.
Available Tax Credits
- New Tax Credits under the Inflation Reduction Act – Taxpayers who take steps to make their homes more energy efficient, such as installing energy efficient windows or adding solar panels, may qualify for the following credits:
Energy Efficient Home Improvement Credit – This applies only to improvements to an existing home. The amount of the credit is a percentage of the total improvement expenses in the year of installation. For 2023 through 2032 its 30%, generally up to $1,200 annually.
Residential Clean Energy Credit – This is available for existing and newly constructed homes. For 2023 through 2032, this credit is 30% of the total improvement expenses, generally with no annual maximum or lifetime limit.
Electric vehicle credits (new) – the “new qualified plug-in electric drive motor vehicles” credit was replaced with the clean vehicle credit, which is subject to many limitations (including income limitations). Beginning in 2024, this credit will cease to be available for two- and three- wheeled vehicles.
Electric vehicle credits (used) – Beginning in 2023, if you purchase a used electric vehicle from a licensed dealer for $25,000 or less, you can claim a credit that equals 30% of the sales price up to a maximum credit of $4,000.
- Savers credit – Low-income retirement savers can receive up to a $1,000 credit ($2,000 if filing jointly) for contributing to qualifying retirement plans. Be careful, though, the credit begins to phase out once your Adjusted Gross Income reaches a certain level.
- Education credits – If you have a child in college and under the income phase out range ($80,000-$90,000; $160,000 – $180,000 for joint filers), you may be able to claim the following credits:
- American opportunity credit – This tax break covers 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses. The maximum credit, per student, is $2,500 per year for the first four years of postsecondary education.
- Lifetime learning credit – This tax break, up to $2,000 per tax return, is available for postsecondary education expenses beyond the first four years.
Net Operating Losses and Excess Business Loss Limitation
Net operating losses (NOLs) generated in 2023 are limited to 80% of taxable income and are not permitted to be carried back. Any unused NOLs are carried forward subject to the 80% of taxable income limitation in carryforward years.
A non-corporate taxpayer may deduct net business losses of up to $289,000 ($578,000 for joint filers) in 2023. The limitation is $305,000 ($610,000 for joint filers) for 2024. A disallowed excess business loss (EBL) is treated as an NOL carryforward in the subsequent year, subject to the NOL rules. With the passage of the Inflation Reduction Act, the EBL limitation has been extended through the end of 2028.
Additional Considerations for Individuals
- Certain retirement savings accounts provide tax beneficial methods of savings for the future. Review what options are available to you, including potential donation matches from employers, when considering your tax and savings strategy for 2023.
- Look over insurance policies and accounts to ensure there are no beneficiary changes that need to be made this year.
- Discuss whether converting funds from a Traditional IRA to Roth IRA account would be beneficial for you.
- Review your tax withholding and make any necessary changes for the upcoming year based on current and future expected income.
- Virtual and cryptocurrency reporting: Buying, selling, or using virtual currencies and non-fungible tokens (NFTs) can have tax implications for taxpayers. Keep this in mind as the tax filing season approaches.
- Phishing and fraudulent schemes: The IRS has issued several notices reminding taxpayers that first contact is always made by regular mail. Any emails, phone calls, or texts from someone claiming to be with the IRS is most likely an attempt at fraud.
While these are great places to start your year-end tax planning and 2024 tax strategy, every situation is unique. Working with a knowledgeable tax professional can set you up for success. Give our team a call to discuss what last minute moves you, or your company, should be making and to create a plan for next year.
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