2023 has been an interesting year of extended Federal and California deadlines due to the California storms of late 2022. Unless we experience other unusual weather conditions, we do not expect the taxing authorities to extend deadlines in 2024. With the close of the year upon us, it’s a great time to finalize year-end tax optimization strategies to ensure timely filing next year. Please find some of our favorite savings opportunities to consider below.
Capital Gain Harvesting or Loss Harvesting: Capital gain tax rates are currently expected to remain unchanged. With recent market conditions, it may be a good time to harvest losses. Total net capital losses (after offsetting all realized capital gains) are only allowed to offset other income, such as interest and dividends, up to a maximum of $3,000 in any given year. Any excess losses are carried over indefinitely and can offset future realized gains. Assuming you have excess realized losses this year, you may also consider realizing gains to offset current year losses. If you have investments you intend to write off, but the companies have not yet shuttered, we can advise on potential strategies to accelerate the losses.
Energy Credits: The Inflation Reduction Act increased the federal solar tax credit to 30% and extended it through 2032. In addition, starting in 2023, the prior $500 lifetime credit for energy efficient home improvements has been increased to a $1,200 annual limit, subject to specific improvement limitations.
General Charitable Contributions: Donations made to charitable organizations are deductible if taxpayers itemize deductions. Gifting a combination of cash and stock to public charities in 2023 grants, you may take a deduction of up to 50% of your adjusted gross income. To donate a combination of stock and cash, you could gift appreciated stock up to 30% of your AGI to a public charity.
Charitable Contributions of Appreciated Assets: Rather than using cash to support your favorite charity, consider gifting highly appreciated assets held for over one year. This will yield a double tax benefit: you receive a charitable deduction for the fair market value of the donated assets and forgo paying capital gains taxes on the gains. Please note the deduction on donating appreciated assets is limited to 30% of your adjusted gross income. Any overage is rolled forward for five years until used. Please note that gifts of non-publicly traded assets typically require a formal appraisal.
State and Local Tax (SALT) Deductions Capped: The combined state income tax and property tax deduction is still limited to $10,000 for tax year 2023.
SALT Opportunity with State Passthrough Entity Tax (PTE): Taxpayers who are partners or shareholders in a trade or business passthrough entity (S-corporation or partnership) should consider electing into the California PTE. This allows a tax deduction to an entity’s shareholders or partners without limitation for Federal purposes, and a credit for California purposes. We encourage you to inquire about this potential deduction as the calculations are complex and, in some circumstances, may be limited. Please note in order to elect into this provision for 2023, California requires that a specific payment must have been made by June 15th, 2023 by the passthrough entity (extension applies for CA storm victims up to November 15, 2023). Without payment, the election is invalid. Participation into the California PTE is available on a yearly basis.
IRA Funds: Reminder: Take your Required Minimum Distribution (RMD), if applicable. Beginning in 2023 the SECURE 2.0 Act raised the age for RMDs to 73. If you reach the age of 72 in 2023, the required beginning date for your first RMD is April 1, 2025, for the 2024 tax year.
Given depressed market conditions, you might consider converting from a pre-tax IRA to a Roth IRA. This might be beneficial if the assets in your pre-tax IRA are currently depressed or if you expect to be in a lower tax bracket. Converting a pre-tax IRA to a Roth IRA will result in income recognition, but provides a future benefit of tax-free distributions, no required distributions, and the ability to pass along a tax-free asset to your heirs.
Interest Deductions: Taxpayers looking to purchase new homes may now deduct mortgage interest on loans up to $750,000 of the principal ($375,000 for married filing separate taxpayers). Interest on home equity indebtedness is no longer deductible. For loans written prior to 12/15/17, which are “grandfathered”, interest can be deducted up to $1M of the principal. Refinances after 12/15/17 are still eligible for “grandfathered” treatment if the original debt was secured before 12/15/17. Mortgage loans on rental properties are still fully deductible. Certain loans where proceeds were used for investing purposes may also be deductible as investment interest expense.
Qualified Small Business Stock (QSBS): Gains on sales of Qualified Small Business Stock held for more than five years may be eligible for a federal gain exclusion ranging from 50% to 100%, depending on your date of purchase. Taxpayers not yet meeting the 5-year holding requirement may be able to defer recognition of their capital gains by rolling over their proceeds into new QSBS investments.
20% Passthrough Deduction (Section 199A): Your self-employed or passthrough operating business income may be eligible for the deduction. We encourage you to ask us about this potential deduction as the calculations are complex and, in many circumstances, benefits are limited.
Stock Options: If you own options with fast approaching expiration dates, or options with exercise prices well below today’s market value, it may be time to consider exercising. Timing for option exercise is a matter of personal preference based on your expectations of the stock price. Additionally, there could be significant tax implications to consider. We strongly recommend seeking advice before any exercise.
Bonus Depreciation: As a reminder, the Tax Cuts and Jobs Act (TCJA) started to phase out the 100% bonus depreciation starting January 1, 2023. Bonus depreciation now is only 80% and will continue to decrease in future years. Starting in 2024, it will decrease again to 60% and then to 40% in 2025. Bonus depreciation is available for both new and used qualified property.
Gifting: Current legislation does not include any changes to the lifetime exemption (the maximum amount a person can give during their lifetime or at death without incurring federal gift or estate taxes). The amount of lifetime exemption for the 2023 tax year is $12.92 million and, without any tax law change this year, will continue to be adjusted for inflation each year. This level of lifetime exemption is set to sunset at the end of 2025 and revert to $5 million per person for 2026. Given this expected reduction it may be prudent to start thinking about your future estate and gift planning needs. Taxpayers may still make annual exclusion gifts of up to $17,000 per recipient without affecting their lifetime exemption.
With current market conditions, it may be an ideal time to gift assets while values are depressed or depreciated. Certain estate gifting strategies such as forming a grantor retained annuity trust (“GRAT”) may be useful. When implementing a GRAT strategy, appreciation passes to your beneficiaries without affecting your lifetime gifting exemption. Gifting strategies are complex, and we encourage you to contact us or your estate planning advisor to discuss the best options available to you.
Corporate Transparency Act: Starting January 1, 2024, all entities formed or registered to do business in the United States will need to take one of the following actions: (1) confirm they qualify for an exemption or (2) timely file a Beneficial Ownership Information (BOI) form with U.S. Treasury’s Financials Crime and Enforcement Network (FinCEN). Entities formed prior to January 1, 2024, have until January 1, 2025 to report. Assuming no exemptions apply, an entity will need to provide details and list individuals who directly or indirectly control at least 25% of the entity. We will provide more specific details in a future email blast as rules and guidelines develop.
IRS Increased Enforcement: In 2022, President Biden signed the Inflation Reduction Act, which included a provision to increase the IRS’ budget by nearly $80 billion over the next 10 years. As such, the IRS will allocate more resources toward examination of high-income and high-net worth individuals, as well as large corporations and partnerships. In advance of increased scrutiny, we recommend keeping good records and being “audit-ready”, especially as the IRS will direct more attention to deductions and items of significant income-recognition.
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