Dear Clients:
As 2023 comes to a close, it’s a wonderful time for us to consider some possible strategies that might help lower our taxable income for 2023. We will mention a few possibilities to consider here.
The key changes in the tax laws for 2023 are a result of two laws enacted in 2022, the Inflation Reduction Act (IRA) and the SECURE 2.0 Act. The 2022 IRA expanded the clean energy credits, while the SECURE 2.0 Act made various changes to encourage taxpayers to save for retirement.
The following are a few considerations you may want to put into place in order to potentially reduce your tax liability for 2023.
Standard Deduction vs Itemized Deductions: The Tax Cuts and Jobs Act of 2017 (TCJA) substantially increased the standard deduction amounts, thus making itemized deductions less attractive for many individuals. For 2023, the standard deduction amounts are: $13,850 (single); $20,800 (head of household); $27,700 (married filing jointly); and $13,850 (married filing separately). If your total itemized deductions for 2023 will be close to the standard deduction amount, we should evaluate whether alternating between bunching itemized deductions into 2023 and taking the standard deduction in 2024 (or vise versa) could provide a net-tax benefit over the two-year period. For example, consider doubling up this year on your charitable contributions rather than spreading the contributions over a two-year period. If these contributions, along with your mortgage interest, medical expenses, real estate taxes exceed your standard deduction, then itemizing such expenses this year and taking the standard deduction next year may be appropriate.
Charitable Contributions: If you are itemizing deductions, you can maximize the tax benefit of making a charitable contribution by donating appreciated assts, such as stock, instead of cash. Doing so generally allows you to deduct the fair market value of the asset while also avoiding the capital gains tax that would otherwise be due if you sold the asset. It is important though to keep in mind that tax deductions for contributions of appreciated long-term capital gain property may be limited to a certain percentage of your adjusted gross income depending on the amount of the deduction.
Additionally, if you have an individual retirement account and are at least 70-1/2 years old, you are eligible to make a charitable contribution directly from your IRA. This is more advantageous than taking a distribution and making a donation to the charity that may or may not be deductible as an itemized deduction. If you itemized deductions, including the contribution, are less than your standard deduction, then you receive no tax benefit from making the donation. By making the donation directly from your IRA to a charity, you eliminate having the IRA distribution included in your income. This in turn reduces your adjusted gross income (AGI). And because various tax related items, such as medical expense, taxability of social security income or the 3.8 percent net investment income tax, are calculated based on your AGI, a reduced AGI can potentially increase your medical expense deduction, reduce the tax on social security income, and reduce any net investment income tax.
Expenses Incurred While Working from Home: Although more people are working from home these days, related expenses are not deductible if you are an employee. However, if you are self-employed and worked from home during the year, tax deductions are still available. Therefore, if you have been working from home as an independent contractor, we should discuss what expenses you have incurred that might reduce your taxable income.
Mortgage Interest Deduction: If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your acquisition indebtedness (mortgage) could be limited. The mortgage interest deduction on mortgages of more than $750,000 obtained after December 14, 2017, is limited to the portion of the interest allocable to $750,000. If you have a mortgage on a principle residence acquired before December 16, 2017, the limitation applies to mortgages of $1,000,000 or less. However, if you operate a business from your home, an allocable portion of your mortgage interest is not subject to these limitations.
Deductions for Interest on Home Equity Debt: Interest on home equity debt may be deductible where a client used that debt to buy, build, or substantially improve his or her home.
Qualified Business Income Passthrough Tax Break: Under the qualified business income tax break, a 20% deduction is allowed for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizers and nonitemizer, it is taken on your individual tax return as a reduction to taxable income. This tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below a certain threshold…$364,200 for joint filers; $182,100 for other taxpayers…are simpler and more permissive than the rules that apply to individuals with income above those thresholds.
Child Tax Credit for 2023: For 2023, a child tax credit of as much as $2,000 is available for each child under age 17, depending on modified adjusted income.
Clean Energy Credits: For 2023, the clean energy tax credits available include (1) residential energy property credits (the energy efficient home improvement credit and the residential clean energy credit) and (2) vehicle-related credits (the new clean vehicle credit, the previously owned clean vehicle credit, and the alternative fuel refueling property credit). These credits were significantly expanded by the Inflation Reduction Act, generally beginning in 2023.
The energy efficient home improvement credit is 30% of the costs of all qualified energy efficiency improvements and residential energy property expenditures you make during the year. This credit is subject to an annual limit of $1,200, and there are also limits for specific types of improvements. Varying credit limits are for exterior doors, windows and skylight, air conditioning, electric panels, natural gas, propane, etc. An annual limit of $2,000 for heat pumps, heat pump water heaters, biomass stoves, etc.
The residential clean energy credit equals 30% of the cost of certain qualified property installed on or used in connection with your home. These include: solar electric property, solar water heating property, fuel cell property, small wind energy property, geothermal heat pump property, and battery storage technology.
A new clean vehicle credit of up to $7,500 may be available if you acquire a qualified electric vehicle and place it in service this year. To qualify it must have been assembled in North America.
Investment Portfolio: Late in the year is a great time to contact your investment advisor and determine if you have any securities that you might want to consider selling at a loss in an attempt to offset some of the gains that have been generated during the year.
Retirement Planning: Investing the maximum amount allowable in a qualified retirement plan will yield a large tax benefit. For 2023, you can defer up to $22,500 in income into a 401(k). A simple 401(K) pre-tax contribution of $15,500 and the amount increases to $19,000 if over 50. The maximum IRA deductible contribution for 2023 is $6,500 and that increased to $7,500 if you are over 50.
Future Legislation: There have been ongoing discussions about a potential tax deal regarding reinstatement of the ability to expense 100% of a business’ research and development expenses, which expired at the end of 2021, in exchange for an enhanced child tax credit that is similar to the 2021 enhanced child tax credit enacted as part of the American Rescue Plan Act of 2021. It’s unclear as to what tax legislation or any will be passed before year-end so we will base our year-end planning on current law.
I look forward to seeing you all soon. Please let me know if you have questions.
Have a very Happy Holiday season!!!!