We have seen several tax law changes over the past few years for high-net-worth individuals. As we close out 2023, one of the top tax planning areas to keep in mind involves the sunsetting of key provisions of the Tax Cuts and Jobs Act (TCJA). While these provisions go away in 2025, there are many planning elements to take advantage of now. But the TCJA isn’t the only factor when planning to maximize opportunities and minimize taxes. Below highlights some conversation starters for you and your tax advisers before end of year.
Absent new legislation, below is the fate of some of the most popular TCJA provisions by 2025:
While many of these expiring provisions are technically 2024 planning items, because of their magnitude you should begin discussions with your tax advisers now. Having the right mindset in place will allow for a strategic approach and actions throughout 2024.
There have been some updates to the Clean Vehicle Credit for the 2023 tax year:
Visit fueleconomy.gov for a list of eligible vehicles with their credit amounts.
Much like prior years, retirement planning options are largely the same — and are a great way to maximize tax benefits. Below outlines the updated adjustments for contribution limits as well as ROTH conversion and retirement distribution details.
With the income tax rates assumed to be adjusted to pre-TCJA limits after 2025, you may want to consider a ROTH conversion now. This planning idea allows you to convert a traditional IRA to a ROTH IRA and pay the tax on your retirement income in the year of conversion.
Starting in 2023, the age at which a taxpayer must begin taking required minimum distributions (RMDs) is increased to 73 for individuals who turn 72 after 2022; 72 for individuals turning 72 before 2023; and 70 ½ for individuals turning 70 ½ before 2020.
The kiddie tax rules remain unchanged this year, except for an adjustment to income levels. Children under the age of 19 and college students under the age of 24 with unearned income of more than $2,300 will be taxed at their parents’ income tax rate. If children only have interest and dividend income of $11,500 or less, the parent may be able to elect to include that income on their return rather than filing a child’s return.
In 2023, taxpayers will be able to claim a maximum of $2,000 for the child tax credit. The credit is refundable up to $1,600. Income phaseouts for these credits start at $400,000 for married filing joint and $200,000 for all other filers.
Starting in 2024, 529 account holders will be able to transfer up to a lifetime limit of $35,000 to a ROTH IRA for a beneficiary. This will help limit, or eliminate, any taxes or penalties for nonqualified withdrawals from the 529 account. This can also help avoid income limitations for individuals in years when income exceeds ROTH contribution limits. There are some stringent rules to follow, so please review them closely with your adviser.
Charitable contributions are always a great method to reduce taxable income. Due to changes in the law over the last several years, you may need to carefully plan the timing of your donations to help ensure the maximum tax deduction.
For the 2023 tax year, cash charitable contributions are the same as in 2022. An individual may deduct up to 60% of their AGI for contributions made to public charities.
If you itemize because of your charitable contributions, you may want to determine if it would be beneficial to set up a donor advised fund. This would allow you to make a large, single-year contribution to maximize your tax deduction. This strategy allows you to “bunch” your contributions into one year, where you benefit from itemizing in that year and then take the standard deduction in the other years. You can donate the cash — or, even better, appreciated stock — into a donor advised fund and receive the charitable deduction, then use the funds to donate to a charity at a later time.
Consider making qualified charitable donations (QCDs) directly from your traditional IRA if you are age 70 ½. These donations are not included in your gross income or as an itemized deduction. QCDs help satisfy RMDs for the year of donation. Reducing your IRA balance may be more beneficial to do now, as tax rates are scheduled to increase post 2025.
For Health Savings Accounts (HSAs), the 2023 annual contribution limits have increased to $7,750 for families and $3,850 for individuals. If you are 55 or older, there is an additional $1,000 catch-up contribution you can make. In addition, if you have a Flexible Spending Account (FSA), make sure you monitor the balance in your account. You may lose funds not used by the end of the plan year.
Whether you currently have an overall capital gain for the 2023 tax year or are expecting to realize losses, analyze the options below to see what is right for your specific tax situation:
The NII tax is equal to 3.8% of the lesser of net investment income or modified AGI that exceeds $250,000 for married filing joint or $200,000 for single and head of household filers. To reduce the tax, you can:
A recent court case has also created a new avenue for taxpayers living outside of the U.S. with certain foreign tax credits to potentially offset their NII tax liability. Read our recent blog.
As mentioned previously, the gift and estate tax exemptions are set to decrease with the sunsetting provisions of the TCJA. With that in mind, the annual limitations have increased for tax year 2023 to $12,920,000 for individuals and $25,840,000 for married filing jointly. Here are some items to consider:
Read “What You Need to Know About Estate & Business Succession Planning”
The TCJA’s Qualified Opportunity Zone (QOZ) program incentivizes long-term investment in low income and economically distressed communities. It allows you to defer capital gains tax when you invest those gains into QOZ Funds. If you have capital gains from an unrelated party, you have 180 days (or more in certain circumstances) to invest in a QOZ Fund and can defer that gain until 2026 if you meet certain requirements. In addition, if the new QOZ investment is held 10 years or more, any gain on disposal of this investment would be exempt from federal taxes.
Currently there are 36 states that have enacted the pass-through entity (PTE) tax in various forms, with other states working on similar legislation as well. A PTE tax allows a pass-through business to be taxed at the entity level, alleviating some of the federal tax burden of the $10,000 state and local tax deduction cap at the owner level.
The PTE tax can be of great benefit to business owners in states that have enacted such a law. Additionally, PTE elections have proven to be even more valuable in a year where owners may have a sale or other unique transaction subject to state tax. However, be aware that no state is the same in their approach to PTE tax, so you must carefully consider each state’s PTE tax and how it may or may not benefit you. Additionally, in terms of federal deductions, we are still looking for clarity on the treatment and taxation of state tax refunds where a tax benefit was received due to a partnership deduction.
Read “How Your Ohio Pass-Through Business Can Be Taxed as an Entity in 2022.”
The biggest message regarding year-end tax planning is time. Give yourself and your advisers time to implement the best plan for you before December 31. Some strategies will take more planning than others, so the sooner you speak with your tax adviser the better you will be prepared for the 2023 tax filing season.
Contact Matt Rager at mrager@cohenco.com or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.