As December 31st approaches, now is an excellent time to consider planning actions that could
lower your tax bill for this year and possibly next.
Despite major tax changes from recent years generally remaining in place, including lower income
tax rates and larger standard deductions, the time-tested approach of deferring income and
accelerating deductions to minimize taxes still works for many taxpayers. So, too, does bunching
expenses into this year or next to minimize income taxes overall.
2023 continues to provide opportunities for tax planning. Below we have included summaries of
tax planning strategies for Individuals and Businesses.
The following may help you save tax dollars if you act before year-end. Not all will apply to you,
but we can certainly help you determine which might be of benefit. Please look at the list below
for items to consider. If any of them apply, we recommend that you reach out to us by Friday,
December 8th to make an appointment to ensure that you have adequate time to implement any
of these tax strategies. We look forward to hearing from you!
Year-End Tax-Planning for Individuals
Tax Bracket Management / Investment Planning
One of the most common and effective methods of income planning is management of capital
gains recognition. If you are thinking about selling stock before year-end, there are a few
strategies you can use to lower your tax bill.
Postpone Income / Accelerate Deductions
Your income level affects more than just your marginal tax rate. Your eligibility for many
deductions and tax credits can vary based on your income. Consider postponing income until
2024 or accelerating tax deductions into 2023 if doing so will allow you to claim some of these
valuable tax-breaks:
- Child tax credits (phaseout begins at $400,000 for married couples, $200,000 for all
others) - Education credits (phaseout begins at $160,000 for married couples, $80,000 for all
others) - Deductible IRA contributions (phaseout depends on a number of factors)
- Student loan interest deduction (phaseout begins at $150,000 for married couples,
$75,000 for all others) - Medical expenses (only amounts in excess of 7.5% of your adjusted gross income (AGI)
are eligible to be claimed as an itemized deduction)
Tax Gain “Harvesting”
- If you hold long-term appreciated-in-value assets, consider selling enough of them to
generate long-term capital gains that can be sheltered by the 0% or 15% rate. The 15%
rate applies to married couples with up to $553,850 of taxable income in 2023 ($492,300
for single filers). - If you have pre-existing capital loss carryovers or sold investments at a loss earlier in
the year, consider selling appreciated assets before year-end to “harvest” tax-free capital
gains. Your net gains, up to the loss (or loss carryover) amount, will be tax free.
Tax Loss “Harvesting”
- If you sold appreciated investments earlier this year or are expecting capital gains from
other sources, consider selling investments that have declined in value. The resulting
“harvested” capital losses will offset those gains, making them tax-free. - If your losses exceed your capital gains, the excess can offset another $3,000 of your
other income. Any leftover loss can be carried forward to future years.
Capital losses are most effective if they can be used to offset short-term capital gains that are
taxed at your higher ordinary rates. And be sure to consider the 30+ day wash loss rules if you
intend to repurchase the identical investment.
Tip: Be sure to discuss these strategies with your investment advisor before taking any
action to ensure these are in-line with your over-all investment objectives!
Net Investment Income Tax
Think about taking steps to limit the 3.8% Net Investment Income Tax (NIIT) charged on unearned
income, such as recognizing capital losses in your portfolio, disposing of a passive activity to free
up suspended losses, or accelerating some of your deductible expenses.
The net investment income tax (NIIT) kicks in for married couples with modified adjusted gross
income over $250,000 ($200,000 for single filers) in 2023.
Washington State Capital Gains Tax
- In March of 2023, the Washington State Supreme Court ruled that a tax on long-term
capital gains was constitutional. As a result, Washington-source long-term capital gains
exceeding $250,000 annually are now subject to a 7% state tax. - Certain exceptions to this tax include gains on sale of real estate, including a residence,
sales of depreciable business property, or sales of a “family-owned” business that had
less than $10,000,000 of revenue in the previous 12-months and meets certain other
qualifications. - Long-term capital loss harvesting before the end of 2023 may help minimize exposure to
this new tax. (And be sure to remember – short-term capital losses do not offset long-term
capital losses for purposes of the Washington state capital gains tax!)
Retirement Accounts
Excess Accumulations Tax (Under-Distribution Penalty)
You can’t leave your money in your retirement account forever. Generally, individual retirement
account (IRA) owners must take their first RMD by April 1 of the following year they reach age 72
(73 if they reach age 72 after December 31, 2022). For a 401(k) plan, you must take your first
RMD by April 1 of the year following the later of the year you turn 72.
The excise tax on insufficient distributions is now 25%, so remember to take your RMD before
year-end. The penalties for not doing so are substantial!
Planning with Retirement Accounts
- If you are at least 70 ½ years old you can make a qualified chartable distribution of up to
$100,000 from your traditional IRA to a 501(c)(3) charity. This distribution can also count
towards any required minimum distribution (RMD) that you are required to make. The
distribution is made directly to charity from your IRA, and the amount of the distribution is
excluded from your adjusted gross income. This is an especially effective strategy if you
are required to make an RMD are unable to itemize your deductions. You get the full
benefit of the charitable contribution (by directly reducing your adjusted gross income) and
are still entitled to claim the entire standard deduction. - In years when your income is lower than usual, consider converting a portion of your
traditional IRA to a Roth IRA. Since this involves recognizing ordinary income on the
amount converted, this may be an especially attractive technique in a year when favorable
tax attributes need to be consumed before they expire – such as charitable deduction
carry-forwards or Net Operating Losses (NOLs). There can also be substantial estate
planning benefits in the right situation.
Other Tax-Advantaged Accounts
- Compare your medical costs this year to what you anticipate next year and consider if you
contributed enough to your employer’s health Flexible Spending Account (FSA). Be
sure to use all of your FSA account before the end of the year! - If you become eligible in December of 2023 to make Health Savings Account (HSA)
contributions, you can make a full year’s worth of deductible contributions for 2023. If you
haven’t already made the maximum contribution for the year, consider maxing out your
contribution. - Plan on helping a child or grandchild with college expenses? While it does not come with
an up-front tax deduction, contributions to a Section 529 College Savings Account are
able to grow tax-free to help cover future tuition. You can also “super-fund” these accounts
with 5 years’ worth of annual exclusion gifts ($85,000 in 2023). However, keep in mind
that you’ll need to file a gift tax return to employ the “super-fund” strategy because it
requires making an election that can only be made on a gift tax return.
Itemized Deductions
Itemized deductions can help reduce your taxable income, but only if they exceed your 2023
standard deduction ($27,700 for joint filers / $13,850 for single / $20,800 for Head of Household).
You may be able to work around these deduction restrictions by applying a “bunching strategy”
to push or pull discretionary expenses into a year when they can do some good.
If you expect you’ll be able to itemize deductions this year but not next year, consider:
- Making your January 2024 mortgage payment before the end of 2023
- Pre-paying your property tax bill
- Making two years’ worth of charitable contributions this year
- Doing an elective medical procedure before year-end, or buying necessary medical
equipment
Note the $10,000 limitation on property, state and local, and personal property tax deduction will
remain in effect until the end of 2025. Business Owners should consider a “SALT Cap
Workaround” (discussed further in the business section) for taxes paid to states other than
Washington.
Charitable Giving Strategies
- Consider giving to a Donor Advised Fund (DAF) that aligns with your charitable goals. This
can allow you to “bunch” your charitable giving and get an up-front itemized tax deduction,
while still allowing you to spread out contributions to charities over multiple years. - Consider donating appreciated assets that you have held for more than 12 months (like
stock or real estate) to charity. You can take a tax deduction for the full fair market value
without also paying capital gains tax – a double tax benefit!
Energy Tax Credits
“Going green” continues to provide generous tax write offs. The Inflation Reduction Act of 2022
provided new and expanded tax credits for everything from electric vehicles to solar panels and
energy efficient home improvements. The rules are complex, but there’s still time to save – or
plan to employ these strategies in the coming year (2024).
Electric Vehicle Credit
The Inflation Reduction Act extended the Electric Vehicle Credit of up to $7,500 per vehicle
through 2032. Purchase of a used electric vehicle may qualify for a credit of up to $4,000. The act
also implemented several changes, including restrictions on the vehicles that qualify for the credit.
The most notable include a new requirement that the vehicle be finally assembled in North
America. Dollar caps have also been placed on manufacturer suggested retail price (MSRP),
meaning many luxury electric vehicles no longer qualify for the credit.
Residential Clean Energy Credit
The Residential Clean Energy Credit allows a nonrefundable tax credit of up to 30% of expenses
paid for installing clean household energy, including solar, wind, or geothermal property as well
as battery storage technology.
Energy Efficient Home Improvement Credit
The Energy Efficient Home Improvement Credit provides a 30% credit for purchases of eligible
primary home improvements, such as central air-conditioning systems, heat pumps, exterior
doors, insulation, water heaters, windows, etc. The items must meet certain energy efficiency
ratings to qualify.
A tax credit of up to maximum of $1,200 can be claimed each year. Lower annual limits apply to
certain costs: doors ($250 per door, up to $500 per year), windows ($600), and home energy
audits ($150).
Tip: If you made energy efficient improvements, purchased an electric vehicle, or plan to
do so in 2024, or have questions about whether any of these credits may benefit you –
contact us today. The rules are complex, and careful research and planning now can be
beneficial.
Annual Gift Tax Exclusion
The annual gift tax exclusion allows you to give up to $17,000 ($34,000 per married couple) to as
many different individuals as you like in 2023 without using any of your federal lifetime exemption
amount ($12,920,000 for single individuals in 2023) or report it to the IRS on a gift tax return.
Looking to 2024, the annual gift tax exclusion will rise to $18,000 per person, and the federal
lifetime exemption will increase to $13,610,000 per person.
Note: The increased federal lifetime exclusion is still scheduled to “sunset” on December 31, 2025
unless congress acts – it’s expected to be cut by approximately half in 2026. Please keep an eye
out for a future newsletter from us that will go over this in more detail, including the best ways to
take advantage of these considerable gifting opportunities before they expire.
These strategies will be particularly helpful if you anticipate your estate will be subject to federal
or Washington state estate tax. If you have questions or concerns about whether this may apply
to you, contact us today.
Underpayment Penalty Mitigation
Internal Revenue Service requires income tax be paid throughout the year, via withholding and/or
quarterly estimated tax payments. With the recent rise in interest rates, underpayment penalty
rates have risen dramatically – they currently stand at a whopping 8%. This makes year-end tax
projections, planning, and careful review of estimated tax payment schedules and withholding
levels more important than ever before.
Tip: Contact us today if you’d like help avoiding these costly penalties. We’ll review your
expected withholding, estimated tax payments and expected taxable income and let you
know if you’re at risk.
Year-End Tax-Planning for Businesses and Business Owners
Analysis of Your Financial Statements
Look at where your business is positioned with income and expenses to close out the tax year.
This may mean getting caught up on your bookkeeping to have a better picture of where your tax
situation stands. We can help you analyze your financial statements for tax savings and planning
opportunities.
Cash vs. Accrual Method of Accounting
Taxpayers using the cash (as opposed to accrual) basis method of accounting may find it a lot
easier to manage income – by, for example, holding off billings until next year, accelerating
expenses, paying bills early, or by making certain prepayments.
Tip: If your business is on the cash method and you want to optimize your tax bill, contact
us today!
Capital Asset Purchases (Machinery/Equipment)
There are generous write-offs available for businesses that purchase new capital assets this year.
If you’re looking to accelerate your deductions into 2023, consider making machinery or
equipment purchases before year-end. Most (if not all) of your business’s qualifying purchases
may qualify for deduction in 2023 by utilizing bonus depreciation or making a §179 expense
election.
The phase down of the bonus depreciation deduction from 100% to 0% is underway – but
the §179 expense deduction is here to stay!
Bonus Depreciation Deduction
Businesses can deduct up to 80% of the cost of qualified new business property placed in service
by December 31, 2023 (down from 100% in 2022), by electing to take first year bonus
depreciation. This deduction was formerly 100% in 2022, and will continue to drop to 60% in 2024,
40% in 2025, 20% in 2026 and 0% in 2027.
§179 “Expense” Deduction
Businesses also have the option to expense up to $1,160,000 of qualified new or used property
in 2023 by making a §179 election with their return. However, the amount you can elect to
expense can’t exceed your business’s taxable income for the year. This doesn’t apply to bonus
depreciation.
Tip: There are benefits and drawbacks to claiming bonus depreciation and making the §179
expense election. Let us help you navigate these complexities and ensure you receive the
best tax treatment.
Other Expensing Strategies
Expense Small Dollar Purchases, Repairs, Maintenance, or Improvements
Consider taking advantage of the de minimis safe harbor election, which allows businesses to elect to expense certain small dollar items rather than capitalizing them. Note this election can’t be made to expense costs that are required to be capitalized under the inventory UNICAP rules.
- Most businesses can elect to automatically expense any invoice or item under $2,500
- If your business has an applicable financial statement, you can elect to automatically expense any invoice or item under $5,000.
Tip: Purchasing supplies, equipment, property, or making improvements or repairs before year-end that fall below these dollar value thresholds could help accelerate deductions.
Maximizing Qualified Business Income Deduction (QBID)
Taxpayers, other than C corporations, may be entitled to a deduction of up to 20% of their qualified business income.
Strategies to maximize the QBID include:
- Timing income or expenses to avoid threshold limitations (beginning at $364,200 for a married couple filing jointly, $182,100 for all others)
- Increasing W-2 wages by:
- Paying “reasonable” wages to an employee-owner of an S-Corp
- Paying year-end bonuses to employees
- Placing equipment in service before year-end
Tip: These rules are quite complex, so please contact us before making any moves in this area!
Self-Employed Retirement Plans (SEP-IRA)
If you’re self-employed, maximizing the benefits of your SEP-IRA is a great way to increase your financial security in retirement and minimize your tax bill. Consider maximizing your SEP-IRA
contribution for 2023 to defer income taxes. You can contribute 25% of your self-employment earnings into your SEP-IRA per year, up to a maximum of $66,000 in 2023.
Tip: The rules on using these do not make them optimal for every business, please contact us if this is something you would like to explore further.
Net Operating Losses (“NOL”)
If your deductions (or your C corporation’s deductions) exceed your income for the year, you may have an NOL. In general, you can use an NOL by deducting it from your income in a future year- but this deduction is limited to 80% of your taxable business income in that future year. Any excess NOL that was not utilized can continue to be carried forward.
Tip: If you expect to have a net operating loss in 2023, contact us today. We can advise you on any potential tax benefits and limits.
Research and Development Credit
Businesses engaged in activities to develop or improve products, processes, software, formulas, techniques, or inventions in a way that required some level of technical experimentation to determine the most accurate and appropriate design may qualify for the R&D credit.
Businesses are eligible to capitalize and amortize R&D costs over a 5- or 15-year period. (Previously eligible for a current year deduction prior to 2022).
Businesses can also elect to apply up to $250,000 of their R&D tax credit against the 6.2% Social Security (FICA) tax, as a payroll tax deduction rather than income tax deduction.
Beginning in the 2023 tax year, eligible small businesses are now allowed to apply an additional $250,000 against their 1.45% Medicare tax liability, in addition to the 6.2% Social Security tax.
Tip: Determining eligibility for the R&D tax credit is complex but can bear substantial fruit in the form of tax savings. Contact us today If you think your business may qualify.
Energy Tax Incentives
There are several tax incentives available for businesses that want to decrease their carbon footprint and become more environmentally sustainable. When certain criteria are met, businesses may be eligible to claim tax credits for the following:
- Electricity produced from certain renewable sources (including geothermal, solar and wind facilities)
- Energy efficient home improvements (only available to eligible contractors and manufactured home manufacturers)
- Alternate fuels
In addition, businesses may be eligible for a tax deduction based on the energy saved by qualifying energy efficient commercial building property.
Tip: If your business made energy efficient improvements in 2023, or is considering making energy efficient improvements in 2024, contact us today. The rules are complex, and careful research and planning now can be beneficial.
State Tax Issues
“SALT Cap Workaround” / “Pass-through Entity Tax (PTET)”
The pass-through state income tax deduction allows business owners to deduct state income tax on their business income without limit. This deduction allows a pass-through entity (generally a partnership or S Corporation) to elect to pay the state income tax due on the business income that would otherwise pass through and get paid on the owner’s personal tax returns.
The federal itemized deduction cap of $10,000 ($5,000 if MFS) for state and local taxes doesn’t apply when a pass-through entity pays state and local tax on its earnings at the entity level.
As of 2023, 36 states and one locality have passed legislation allowing the pass-through tax deduction work-around, and some states have even passed retroactive legislation.
Tip: Contact us today if you’re interested in learning more about the PTET or want to discuss whether your business should consider participating in a pass-through entity state tax payment program. If your business already participates in a pass-through entity state income tax payment program, make your “PTET” payments by the end of 2023 to accelerate the deduction into the current year.
These are just some of the year-end steps that can help you save taxes. Please call us to set up an appointment and find out which works best for you.
Very truly yours,
Your Team at Hellam Varon & Co. Inc. PS