News to Help You and Your Business

 

2023 Tax Planning

For most of us, filing a 2023 tax return will look like it did in 2022.  There seems to be more change to Indiana tax law than to the Federal.  As the calendar turns into another election year, it’s worth remembering that significant tax legislation generally occurs in the first or second year of a presidential administration

Days of Future Passed

If you’re of my generation, the phrase “Days of Future Passed” may recall the 1967 ground-breaking album of the Moody Blues, which featured the song “Nights in White Satin.”  If you’re part of the Millennial or Gen Z generations, you might associate it with the super-hero movie franchise, X-Men.  Heavy metal music fans would associate it with the 2021 song by Iron Maiden.  (Suffice it to say, there’s more than just a 56-year difference between Moody Blues and Iron Maiden.)

“Days of Future Passed” foreshadows a 2026 reset of our tax law back to where we were in 2017.  To put it another way, your 2026 tax future, will be the same as your 2017 tax past, which is not the same as today.

The 2017 Tax Cut and Jobs Act brought us significant changes to the tax code.  However, the entire 2017 Act will expire on December 31, 2025, and the tax code in effect before the Act will return.  This should provide some incentive for political parties to act before 2026, but, like many, I don’t see significant changes until, politically, both Congress and the Presidency are in the same hands.

Absent new legislation, here are some notable tax provisions that, in 2026, will revert to 2017 tax law:

• The $10,000 limitation on state and local tax deductions will be eliminated
• The health insurance premium assistance credit will be reduced
• The lifetime exclusion for gifts and estates will be cut in half (currently $12,920,000)
• Miscellaneous itemized deductions will be allowed
• The personal exemption will return
• The standard deduction (currently $27,700 for married couple) will be reduced by about half.
• Tax rates will increase to 2017 levels
• The deduction for Qualified Business Income (QBI) disappears
• The Alternative Minimum Tax (AMT) will, again, apply to more taxpayers

It is important to remember that tax planning can have a big impact whenever change occurs.  Although 2026 seems like a long way off, the people making decisions on tax law will be elected in less than 12 months.  And only a few months later, Congress could pass new legislation to take effect in 2026.  Without congressional action, as far as taxes go, we may soon return to the past.

 

Life Events

Life events, particularly marriage and divorce, have a significant impact on taxes.  If you’re experiencing such a change, be sure to consider how your taxes will change as well.  For example, if you’re going to marry in 2024, consider bunching 2023 itemized deductions onto one tax return so that one taxpayer’s itemized deductions exceed the standard.

Reducing Income

Listed below are some moves that can reduce your taxable income this year:

Charitable Contributions:  With the increased standard deduction and the limitation on the state and local tax deduction, many taxpayers will find it difficult to accumulate deductions that exceed the standard deduction.  For those who have significant charitable contributions, consider bunching your deductions into years so that the total overtops the standard deduction.  For example, if you and your spouse regularly give $3,600 to charity each year, consider making your donations every three years ($10,800).  That amount combined with your taxes and mortgage interest may put you over the standard deduction.  Tools are available to help you smooth out the donations for your charities.

Making donations directly from your IRA (over age 70½) provides you with a deduction regardless of whether you itemize.

Retirement Savings: Make sure you contribute the maximum allowed to your employer’s 401K plan. If you are self-employed or have a side business, you may be able to establish a separate retirement plan to defer up to $66,000 of your income. Maximum contributions for 2023 are $22,500 for 401K’s and $6,500 for IRA’s. Those age 50 and up by December 31 can put in an extra $7,500 into a 401K or $1,000 into an IRA.

Retirement Withdrawals: If you are under age 73, consider delaying part of your withdrawals from your IRA until January.

 

Accelerating Income

If you expect your 2024 income to be significantly higher than in 2023, you may want to pull some of next year’s income into 2023.

Capital Gains: If you anticipate selling investments at a gain during 2024, you could sell those investments in 2023 and move those capital gains into 2023. If you believe that your investment will still increase in value, you can repurchase identical shares the day after you sell the investment. However, unless you hold the replacement shares for one year, the gain when you sell them will be short-term gain in 2024, subject to ordinary income tax rates. In addition, don’t forget about the 3.8% health care tax on high-income taxpayers.

Roth Conversions: If you find yourself in a lower tax bracket this year, consider making a Roth IRA conversion in the amount needed to use up the lower tax brackets.

In-Service Distributions: If you are age 59½, you may be able to make a partial rollover from your 401K into an IRA. From there you gain the ability of making Roth conversions to utilize lower tax brackets.

Stock Options: Consider exercising stock options before the end of the year.

 

Shareholders, Partners, LLC Members, and others to be reported to Financial Crimes Enforcement Network beginning 2024.

You’ve seen news accounts of how criminal enterprises use multiple corporate shells, trusts, and partnerships to disguise the nature and ownership of assets and income to hide activities and evade taxes.  The Corporate Transparency Act was passed in 2021 to give the US Treasury department tools to combat money laundering, tax fraud and other illicit activities.  The IRS seeks to look through the, often, multiple layers of ownership of an entity to identify the actual “beneficial owners.”

You are a “beneficial owner” if you are a 25% shareholder of a business or hold a 25% interest in a Limited Liability Partnership, or, if you can exercise significant control over a business.  Persons with significant control may include corporate officers and, in some situations, external advisors.

Unfortunately, the tool that has been developed will require privately-held US corporations, LLPs, or any other legal entity filing with any secretary of state, to report the names of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).  Foreign companies registered to do business in the US must also report. 

The initial filing deadline is January 1, 2025 for existing businesses.  If you form a new business during 2024, the deadline is 30 days after the entity is created.  The Beneficial Ownership Information report (BOI) must be submitted electronically.  However, the Treasury Department has yet to develop the system for filing.

In addition to providing name, address and birthdate of all beneficial owners, the BOI report will require submission of US government identification such as a passport or driver’s license.

You can learn more about these important requirements at www.fincen.gov/boi.

 

The IRS has been concerned that billions of dollars of taxable income are unreported each year by people using third-party payment networks like PayPal, Cash APP, Venmo and Zelle.  In response, IRS required that form 1099-K be issued whenever transfers to a taxpayer in any calendar year exceed $600.

(Incidentally, the $600 filing threshold was established in 1954 and never adjusted for inflation.  The Bureau of Labor Statistics calculates that $600 in 1954 equates to approximately $6,700 today.)

Unfortunately, these payment apps do not know the difference between the $60 your brother sent you for his share of dinner, the $60 you collected on your yard sale or the $60 you earned selling custom garden gnomes.  All receipts, taxable or not, will be combined and reported on form 1099-K if they add up to $600 or more.

This was to have taken effect last year, but the IRS backed down late in 2022 by increasing the reporting threshold to $20,000.  On November 21, 2023, the IRS announced that they are again holding the reporting threshold at $20,000 for 2023.  IRS also announced that the reporting threshold for 2024 will be $5,000.  Presumably, in 2025 all payments aggregating to $600 will be reported.

Do not ignore form 1099-K!  In the eyes of the IRS all income reported on a 1099 is taxable unless you tell them otherwise.  Not reporting income shown on a 1099-K will trigger a notice and an assessment from IRS.  Be sure to give forms 1099-K to your tax preparer along with a breakdown of the receipts reported on them so they can be included in your tax return, most likely on a Schedule C.  Even non-taxable receipts will need to be reported on your tax return.

 

The IRS has been driving filers of information returns (forms 1099, W2, etc.) to file electronically.  In the past, taxpayers, usually businesses, were able to submit paper forms if they filed fewer than 250 such information returns.  Now, that threshold has been reduced to 10.  Included in that 10 are all information returns.  So, a small employer that files 9 forms W2 and 2 forms 1099 will be required to file all those forms electronically since, together, they total 11 forms.

There are many on-line vendors that allow you to fill out and e-file your 1099s for a minimal fee.  Your payroll service or accounting software can also assist.  The IRS has created a new portal for 1099 filers to directly file information returns.  You can sign up for direct e-filing on the IRIS system at IRS.gov.  However, the registration process is quite complex and most taxpayers will find it easier and quicker to use an on-line service.

 

College Savings (529) Accounts:  Indiana has established a strong incentive to save for college through its College Choice 529 Savings Plan.  Taxpayers are allowed a tax credit of 20% of the amount contributed to Indiana 529 Plans.  Until now, the maximum credit was $1,000, so a $5,000 deposit to one or more 529 accounts generated the maximum credit.  However, beginning this year, the maximum credit has been increased to $1,500 so deposits up to $7,500 will generate a credit.  You can deposit more, but the credit is limited to the lower of 20% or $1,500.  Also, beginning with 2023, you have until April 15 of the following year to make eligible contributions to a 529 plan.

 

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