Year-End Tax Planning Opportunities Are Here

Article Highlights:

  • Not Needing to File a 2023 Return?

  • Are Your Children Attending College?

  • Did You Sell Your Home This Year?

  • Do You Have an Employer Health Flexible Spending Account?

  • Did You Become Eligible to Make Health Savings Account (HSA) Contributions This Year?

  • Is Your Income Unusually Low This Year?

  • Must You Take a Required Minimum Distribution (RMD)?

  • Do You Have Stocks That Have Declined in Value?

  • Do You Have Stocks That Have Appreciated in Value and Your Income Is Low This Year?

  • Have You Considered Prepaying State Income and Property Taxes?

  • Are You Planning Your Charitable Deductions?

  • Do You Have Outstanding Medical or Dental Bills?

  • Have You Forgotten the Annual Gift Tax Exclusion?

  • Do You Think You May Have Under-Withheld Taxes This Year?

  • Did You Suffer a Disaster Loss This Year?

  • Divorced or Separated This Year?

  • Do You Qualify for Energy or Environmental Tax Credits?
    o   Credit for Energy Efficient Home Modifications
    o   Solar Credit
    o   Clean Vehicle Credit
    o   Previously Owned Clean Vehicle Credit

  • Are You a Working Shareholder in an S Corporation?

  • Are You Planning Business Purchases Soon?

  • Are You Self-Employed?

  • Do You Plan to Pay Your Employees a Bonus?

  • Business Awareness Issues
    o   2024 E-File Mandate
    o   Corporate Transparency Act  

Year-end is rapidly approaching, as are the holidays. So, before you become distracted with the seasonal celebrations, it may be in your best interest to consider year-end tax moves that can benefit you for both 2022 2023 and 2023 2024. Here are last-minute tax issues you might consider: 

INDIVIDUAL PLANNING OPPORTUNITES

Not Needing to File a 2023 Return? - If your income and tax situation is such that you do not need to file for2023, don’t overlook the opportunity to bring in some additional income, to the extent it will be tax-free. For instance, if you have appreciated stock that you can sell without incurring any tax, consider selling it, or perhaps take a tax-free IRA distribution if you are 59½ or older or if younger and qualify for an exception to the “early withdrawal” penalty.

Also, just because you are not required to file a tax return does not mean you shouldn’t. By not filing you may miss out on some substantial refundable tax credits.

Are Your Children Attending College? If you qualify for either the American Opportunity or Lifetime Learning education credits, check to see how much you will have paid in qualified tuition and related expenses in 2023. If it is not the maximum allowed for computing the credits, you can prepay 2024 tuition if it is for an academic period beginning in the first three months of 2024. That will allow you to increase the credit for 2023. This is especially effective for students just starting college who only have tuition expenses for part of the year.

Did You Sell Your Home This Year? If so, and if you meet the ownership and occupancy tests, the gain from selling your main home will not be taxed, up to $250,000 ($500,000 if you file a joint return with your spouse who also meets the occupancy test). But if you don’t meet the requirements of both owning and using your home for 2 years in the 5 years counting back from the sale date, you may still qualify for a partial home sale gain exclusion. For example, you may qualify for a reduced exclusion if you sold your home to relocate this year because of a change in employment or due to health. We can determine the amounts of excluded income and taxable gain, and project how your taxes will be impacted.

Do You Have an Employer Health Flexible Spending Account? If so, and if you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. The maximum contribution for 2023 is $3,050. The amount you haven’t used in 2023 that may be carried to 2024 is $610 and must be used in the first 2½ months of 2024.

Did You Become Eligible to Make Health Savings Account (HSA) Contributions This Year? If you become eligible to make health savings account (HSA) contributions late this year, you can make a full year’s worth of deductible HSA contributions even if you were not eligible to make HSA contributions for the entire year. This opportunity applies even if you first become eligible in December. In brief, if you qualify for an HSA, contributions to the account are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses.

Is Your Income Unusually Low This Year? If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. The lower income likely results in a lower tax rate, which provides you an opportunity to convert to a Roth IRA at a lower tax amount. Also, if you have stocks in your retirement account that have had a significant decline in value, it may be a good time to convert to a Roth.

Are You Required to Take a Required Minimum Distribution (RMD)? Once U.S. taxpayers reach the age of 73, they are required to take what is known as a “required minimum distribution” from their qualified retirement plan or IRA every year. If this is the first year that this rule applies to you and you haven’t withdrawn the required amount yet, there’s no need to panic – you don’t have to do so until sometime during the first quarter of next year. Of course, if you wait until 2024 to take your 2023 distribution, you’re going to end up having to take two distributions in one year – one for 2023 and one for 2024.

For those who have been required to take an RMD before 2023, you only have until December 31st to take the required distribution for 2023 if you want to avoid penalties.

Do You Have Stocks That Have Declined in Value? With the stock market’s ups and downs, you should review your stock portfolio and consider selling losers to offset capital gains that would otherwise be subject to the 15% or 20% long-term capital gains tax rate. Capital losses can also offset up to $3,000 ($1,500 in the case of a married taxpayer filing a separate return) of ordinary income if capital losses exceed capital gains by at least that amount. Recognizing capital losses to offset capital gains can also reduce the amount of income subject to the net investment income surtax. Be aware of the wash sale rules that don’t allow you to deduct a loss if you repurchase those loser stocks within 30 days before or after the sale date.

Do You Have Stocks That Have Appreciated in Value and Your Income Is Low This Year? There is a zero long-term capital gains rate for taxpayers whose taxable income is below the 15% capital gains tax threshold. This may allow you to sell some appreciated securities that aren’t in an IRA or retirement account that you have owned for more than a year and pay no or very little tax on the gain. The 2023 15% capital gains tax bracket starts at a taxable income of $89,251 for married joint filers, $59,751 for those filing as head of household, and $44,626 for all other filers.

Have You Considered Prepaying State Income and Property Taxes? You probably know that if you are not subject to the alternative minimum tax and you itemize your deductions, you are eligible to deduct both your property taxes and state income (or sales) tax up to a maximum of $10,000. But did you know that in some cases, and of course if you haven’t exceeded the cap, you can increase the amount that you deduct on your 2023 return by prepaying some of the taxes by December 31, 2023? You can ask your employer to boost the amount of your state withholding by a reasonable amount; or, if you are self-employed, pay your 4th-quarter state estimated tax installment in December (otherwise due in January) and increase your deduction. The same is true for your real estate taxes: if you pay your first 2024 installment in 2023, you can take it as part of your 2023 deduction. But be mindful of the so-called SALT limit – the maximum deductible amount of state and local taxes of all types is $10,000. So, don’t electively prepay state taxes if you are at or above the $10,000 cap.

Are You Planning Your Charitable Deductions? Many people who itemize take advantage of the ability to take a deduction for their donations to their favorite charities or house of worship. Did you know that you can choose to pay all or part of your 2024 planned giving in 2023 in order to increase the amount you deduct in 2023? Though this may not be appealing to those who itemize every year, if you alternate between taking the standard deduction one year and itemizing the next, this can give you a big boost.

Charitable contributions are deductible in the year in which you make them. If you charge a donation to a credit card before the end of the year, it will count for 2023. This is true even if you don’t pay the credit card bill until 2024. In addition, a check will count for 2023 if you mail it in 2023. For last-minute mailings, it may be appropriate to obtain proof of mailing from the USPS. And don’t forget to get an acknowledgment letter or document from each qualified organization that clearly states the donated amount and whether the charity gave you goods or services (other than certain token items and membership benefits) as a result of the contribution.

Did You Know You Can Make Charitable Deductions from Your IRA Account? Those who are age 70½ or older are allowed to transfer funds (up to $100,000 annually) from their IRA to qualified charities without the transferred funds being taxable, provided the transfer is made directly by the IRA trustee to a qualified charitable organization. If you are required to make an IRA distribution (i.e., you are age 73 or older), you may have the distribution sent directly to a qualified charity, and this amount will count toward your RMD for the year.

Although you won’t get a tax deduction for the transferred amount, this qualified charitable distribution (QCD) will be excluded from your income, with the result that you may get the added benefit of cutting the amount of your Social Security benefits that are taxed. Also, since your adjusted gross income will be lower, tax credits and certain deductions that you claim with phase-outs or limitations based on AGI could also be favorably impacted.

If you plan to make a QCD, be sure to let your IRA trustee or custodian know well in advance of December 31 so that they have time to complete the transfer to the charity. If you have contributed to your traditional IRA since turning 70½, the amount of the QCD that isn’t taxable may be limited, so it is a good idea to check with this office to see how your tax would be impacted.

Have Outstanding Medical or Dental Bills? Taxpayers who itemize their deductions are able to deduct qualified medical and dental expenses that exceed 7.5% of their adjusted gross income. If you have reached that threshold or are close, then it may make sense for you to pay off any of those types of bills that are still outstanding rather than paying them over time. If you are near or above the limit, it may also make sense to look at what your medical and dental expenses will likely be for the next year and move those that you can into 2023 to increase the deduction. These expenses could include dental work or eyeglasses. An additional important issue: if you are thinking of doing this by paying using a credit card and you’re not going to pay the card balance immediately, make sure that you’re not paying more in interest than you’re saving with the increased tax deduction.

Have You Forgotten the Annual Gift Tax Exclusion? Though gifts to individuals are not tax deductible, each year, you are allowed to make gifts to individuals up to an annual maximum amount without incurring any gift tax or gift tax return filing requirement. For the tax year 2023, you can give $17,000 (up from $16,000 in 2022) each to as many people as you want without having to pay a gift tax. If this is something that you want to do, make sure that you do so by the end of the year, as you are not able to carry the $17,000, or any unused part of it, over into 2024. Such gifts need not be in cash, and the recipient need not be a relative. If you are married, you and your spouse can each give the same person up to $17,000 (for a total of $34,000) and still avoid having to file a gift tax return or pay any gift tax. Speaking of spouses, there’s no limit on the excluded amount a spouse can gift to their wife or husband.

Do You Think You May Have Under-Withheld Taxes This Year? If you think there’s a chance that the income taxes you’ve paid to date for 2023 are insufficient, it’s a good idea to increase your withholding in the time that’s left before year-end to make up for it. Underpaying taxes makes you vulnerable to an underpayment penalty that is assessed quarterly. The good news is that even if you have underpaid for any or all of the first three quarters of the year and will owe taxes when you file your 2023 return, you can catch up by boosting your year-end withholding, since federal withholding is deemed paid ratably throughout the year. Plus, increased withholding and possible payment of estimated taxes can also reduce the fourth quarter underpayment penalty.

Did You Suffer a Disaster Loss This Year? 2023 has had some significant disasters, including Hurricane Idalia and others, wildfires in the West and on Maui, and severe storms and flooding throughout the U.S. Any property losses incurred because of a federally declared disaster can be claimed on the current year’s tax return or, at the election of the taxpayer, on the prior year’s return (2022 for 2023 disasters), generally providing quicker access to a tax refund. However, care must be exercised to ensure a disaster loss is claimed on the return of the year that will provide the greater benefit. In addition, after insurance reimbursement is accounted for, the result may not be as expected and should be determined before making the decision of which year to claim a loss.

Divorced or Separated This Year? A divorce or separation can have a significant impact on a couple’s tax filings. Filing joint or separate returns, who claims the children, the tax rules related to whether to take the standard deduction or itemize, how income and tax prepayments are allocated, and more issues need to be considered. Best to figure that all out in advance.

Energy & Environmental Tax Credits - There are currently several sizable tax credits available:

Credit For Energy Efficient Home Modifications – This tax credit for making energy saving improvements to taxpayers’ existing homes has been around since 2006. The dollar limits and credit percentages have been modified several times over the years. In addition, the credit had a lifetime credit cap which was recently $500, and the credit rate had been reduced to 10%. Being available for 16 years with a $500 lifetime cap had almost rendered this credit impractical. However, the Inflation Reduction Act has breathed new life into the credit by increasing the credit rate to 30% and by replacing the lifetime credit cap with an annual cap of $1,200. That allows individuals to annually make up to $4,000 of creditable home energy improvements. There are annual limits for certain types of improvements; for example, there is a $600 annual credit limit for residential energy property expenditures, windows, and skylights, and $250 for exterior doors ($500 total for all exterior doors). A new feature is being able to claim a credit of up to $150 in addition to the $1,200 annual cap for an energy audit performed by a certified home energy auditor on your primary residence.

This credit is non-refundable (meaning it can only offset the current tax liability) and there is no carryover.

Solar Credit – There is a 30% nonrefundable federal tax credit for installing solar on your first and second homes (need not own the home). Unused credit can be carried forward to the subsequent year. The credit begins to phase out in 2033. Expenses of battery storage technology with a capacity of not less than 3 kilowatt hours count toward the credit. Battery and systems upgrades will qualify for credit even after the initial installation.

Clean Vehicle Credit – The 200,000-unit limit per manufacturer no longer applies after 2022. But the maximum $7,500 credit depends partly on the vehicle being manufactured in North America and partially whether the critical minerals included in the battery were extracted or processed in the U.S. or a country with a free trade agreement or recycled in North America. Another qualification is that the manufacturer’s suggested retail price cannot exceed $80,000 for vans, SUVs, and pickups, or $55,000 for other vehicles. No credit is allowed if the buyer’s modified adjusted gross income (MAGI) for the credit year, or if less for the preceding tax year, exceeds $300,000 for married individuals filing joint; $225,000 for those filing head of household; and $150,000 for others.

Previously Owned Clean Vehicle Credit – Beginning in 2024, a credit is allowed up to the lesser of $4,000 or 30% of a used clean vehicle's sale price. This credit is for lower income taxpayers and no credit is allowed if the taxpayer’s MAGI for the credit year, or if less for the preceding tax year, exceeds $150,000 for married individuals filing joint; $112,500 for those filing head of household; and $75,000 for others. The vehicle must be acquired from a dealer for a price of $25,000 or less and be the first transfer of the vehicle since this credit was enacted.

For both the new and used clean vehicle credit, the dealer must report required information to the buyer and the IRS, including the maximum credit allowed, the buyer’s name and tax ID number, and vehicle identification number.

BUSINESS PLANNING OPPORTUNITES

Are You a Working Shareholder in an S Corporation? If so, you may not be aware of the IRS’s “reasonable compensation” requirements, which can influence your Section 199A (qualified business income) deduction and your payroll taxes. Reviewing the requirements as they apply to your circumstances may avoid future problems with the IRS.

Are You Planning Business Purchases Soon? If so, you can reduce taxable income if you make last-minute business purchases such as for office equipment, tools, machinery, and vehicles, and write them off using the 80% bonus depreciation or Sec. 179 expensing, provided you place the item(s) into business service by the end of 2023. (The bonus depreciation rate drops from 80% to 60% for business purchases put into service in 2024.) However, you must consider the impact that expensing the items will have on your taxable income and the Sec.199A 20% pass-through deduction. It may be appropriate to contact this office in advance of any last-minute business acquisition.

You might also make sure you are taking advantage of the de minimis safe harbor rule that allows small businesses to expense rather than capitalize the purchase of tangible property up to $2,500.

Are You Self-Employed? If you are self-employed, you can establish a self-employed retirement plan (SEP) and contribute 25% of your business net income, up to a maximum of $66,000 for 2023

Planning on Paying Your Employees a Bonus? Consider paying your employees bonuses before year-end, rather than after the start of the new year. That way you benefit from the tax deduction a year sooner.

Business Awareness Issues – The following are new requirements that every business needs to be aware of and prepared to deal with:

2024 E-File Mandate –Beginning in 2024 an organization (generally a business) filing, in aggregate, 10 or more information returns or statements (previously more than 250) in a calendar year will be required to file electronically. The regulations also require e-filing of certain returns and other documents not previously required to be e-filed.  

Corporate Transparency Act - The Act requires corporations, limited liability companies (including single member LLCs), and similar entities to report certain information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury. This information includes the beneficial owners' full legal names, dates of birth, current residential or business street addresses, and unique identification numbers from acceptable identification documents.

  • A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership information report. FinCEN plans to have their secure online reporting process in place as of January 1, 2024.

  • A reporting company created or registered on or after January 1, 2024, will have 30 days to file its initial beneficial ownership information report. This 30-day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.

Every taxpayer’s situation is unique, and the suggestions offered here may not apply to you. The best way to ensure that you are putting yourself in a tax-advantaged position is to seek advice from an experienced, qualified tax professional. Stop stressing and contact this office for assistance.

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