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As 2023 wraps up, it’s a good time to look at recent changes to the tax laws and regulations that could impact your personal and business taxes for 2023 and beyond. If you have any questions or need additional information, please feel free to reach out to us.
New rule allows for rollover of 529 accounts to Roth IRAs
Tax-advantaged educational savings accounts, also known as 529 plans, provide a way for parents to help their children or other family members save for college or to pay other educational expenses. However, not every beneficiary uses the full amount they paid into the plan. Beginning in 2024, the SECURE 2.0 Act allows beneficiaries to roll over unused funds into a Roth IRA without having to pay a penalty. However, there is a lifetime limit of $35,000 per beneficiary and the 529 account must have been open for at least 15 years. The rollover amount cannot exceed the beneficiary’s annual IRA contribution limit.
IRS warns of fake charities soliciting donations
The IRS is reporting that scammers are taking advantage of the large numbers of recent natural disasters and international conflicts to fraudulently solicit donations to help victims. In addition to lining the pockets of criminals, donating to these fraudulent charities can get you in trouble with the IRS if you try to claim a deduction that ends up being disallowed. The best way to keep from being a victim of this kind of fraud is to check with the Tax-Exempt Organization Search tool on the IRS’s website. Using the tool will both ensure that you are donating to a legitimate charity and that you will be allowed to deduct the donation.
IRS stepping up enforcement for high-income individuals
Using the extra funding it received in the 2022 Inflation Reduction Act, the IRS is moving forward with its plans to prioritize enforcement efforts against high-income earners, partnerships, large corporations and promoters abusing U.S. tax laws. The agency is touting this increased enforcement as part of its efforts to restore fairness to the U.S. tax system and will focus its efforts on taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt.
Website allows for dealer transfers of clean vehicle credits
The IRS is allowing dealers and sellers of clean vehicles to register to use the agency’s new online tool that will allow their customers to claim or transfer their credits for the purchase of a new or previously owned clean vehicle. Beginning in 2024, taxpayers in specified situations will be allowed to claim their clean vehicle credit at the point of sale and transfer it to eligible entities, i.e., dealerships. Clean vehicle sellers and licensed dealers must use the tool to claim or transfer the credit on behalf of a buyer. Once the credit is transferred, it will need to be reconciled on the tax return filed for the year it takes place.
401k / IRA
The simplest way to save taxes is to contribute to your 401k plan or traditional IRA. You saves taxes and pay yourself in the meantime. Remember this as well- this is an IOU to the IRS. When you retire and are forced to withdraw this money, you will be taxed on it. IRA and Roth IRA contributions are due Monday, April 15, 2024 (the typical filing deadline for individual tax returns Form 1040), no exceptions. SEP IRAs remain the same, but can also be extended to September 15 or October 15, depending on which tax return you extended (1065/1120S – Sep 15, 1040/1120 – Oct 15).
Business owners
SEP IRAs are old school. Not always the best option for contribution limits. No Roth options. A 401k plan can be better depending on your situation. Ask how we can help.
Roth conversions
Perhaps you should have us review the conversion of your traditional IRA into a Roth IRA. Yes, pay more taxes today, but perhaps your 2023 income is lower and it makes sense. Or your income is on a rocket trajectory, and this year is the only year it makes sense. Remember that it is usually easier to pay for taxes during your wage-earning years than when you are 80 years old and only have savings to “dip into.” It would be lovely to live in a tax-free world at 80… at least federal income taxes.
2024 limits increase dramatically! 401k is $23,000 + $7,500 for catch-up. IRAs are $7,000 which is indexed but the $1,000 catch-up is not.
Charity
Writing a check to your church is good. Don’t forget the theater, educational organizations, and others. Also, what is not just good, but actually great, is donating toGoodwill, Salvation Army, Arc Thrift, etc. Donating items from the hollows of your closet doesn’t require cash since that money is already spent. Don’t forget qualified charitable distribution. A QCD is a direct transfer of funds from your IRA to a qualified charity. QCDs can be counted toward satisfying your required minimum distributions (RMDs) for the year, as long as certain rules are met.
Donor Advised Fund
You donate significant assets such as cash or securities or both to a donor advised fund. You get an immediate tax deduction for the fair market value, but those assets are not immediately donated to any one charity. This allows for two wonderful things: first, playing on the income-deduction matching principle mentioned earlier, you can make a massive donation during a uniquely high-income year.
Second, you can then take your tax-deducted donation, and spread it out over multiple years while enjoying the tax benefit now.
Here is another consideration involving math: let’s say your itemized deductions add up to $17,000 yet the standard deduction is $27,700 (for the 2022 tax year)… or a difference of $10,000. You could donate $10,000 each year with no additional tax benefit (Yes, the state might give some) since you would be using the standard deduction versus an itemized deduction ($27,700 vs. $17,000) on Schedule A. Do this for 10 years… and your $100,000 does not move the tax needle at all.
But! You donate a $100,000 to a donor advised fund, you get $90,000 at your marginal tax rate as cash in pocket ($90,000 x 24% is $21,600 in cash). You still get the itemized deduction bump of $10,000 to arrive at the standard deduction for 9 more years, your charity gets $10,000 each year as desired, and you are $21,600 richer. Real money, folks!
Profit Harvesting
This is an oldie but a goodie. Speaking of liking cash: sell some of your profitable stocks along with your dogs. Not literally your dogs, but your under-performing securities. Sell enough to create a $3,000 gain and sell some more to add a $6,000 loss, and presto! You’ve pulled out some cash, yay, and created a $3,000 loss and tax deduction.
Here is another variant to the above year-end tax move: you sell securities whose price is stable yet is lower than what you paid. You use these losses to reduce the capital gains on securities you sold previously (profit harvesting). You wait 30 days to prevent wash sale triggers and re-purchase the securities that were sold at a loss (only if you believe it will eventually rebound in a timeframe that makes sense given inflation and other economic conditions).
Pay Bills Earlier
You can pre-pay certain expenses up to 12 months such as rent, insurance premiums, professional fees, stock up on some office supplies, etc. The “12-month rule” lets you deduct a prepaid future expense in the current year (but there are some rules). You want to pre-pay business expenses in years of high income where the following year is going to be less. To pre-pay just to pre-pay without a plan is flailing.
Automobiles
Her we are on everyone’s favorite topic. Buckle up… A question we entertain often is “I want to save taxes. Should I have the company buy me a car?” There are only a few questions you need to ask yourself when considering a car purchase. Are you the type of person who buys new? How long do you typically keep your cars? Is the car 100% business use? How many miles do you plan to drive? If the answer is “Yes” because your bucket of bolts is getting exceedingly dangerous, then Yes, buy a much-needed car out of a sense of safety. If the answer is “Not really, but I want to save taxes,” then don’t. Two rules to live by –
- Cash is King (keep it!)
- Depreciation is a tax deferral not a tax avoidance system (typically)
Additional questions or concerns?
If you have any questions about how the items in this newsletter or any other tax matter could impact you or your business, please feel free to contact us. We understand that taxes can be confusing and complicated. We’re here to help.