If you’re concerned about your 2023 tax bill, there may still be time to reduce it. Here are four quick strategies that may help you trim your taxes before year end.

1. Accelerate deductions and/or defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2024 payment in December, you can deduct the interest portion on your 2023 tax return (assuming you itemize).

   Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay sending invoices until late in December to postpone the revenue to 2024.

   You shouldn’t follow this approach if you expect to be in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income.

2. Take full advantage of retirement contributions. Federal tax law encourages individual taxpayers to make the allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities.

   For 2023, you generally can contribute as much as $22,500 to 401(k)s and $6,500 to traditional IRAs. Self-employed individuals can contribute up to 25% of net income (but no more than $66,000) to a SEP IRA.

3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell underperforming investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis.

   If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years.

4. Donate to charity using investments. If you itemize deductions and want to donate to IRS-approved public charities, you can simply write a check or use a credit card. Or you can use your taxable investment portfolio of stock and/or mutual funds. Consider making charitable contributions according to these tax-smart principles:

• • • Underperforming stocks. Sell taxable investments that are worth less than they cost and book the resulting tax-saving capital loss. Then, give the sales proceeds to a charity and claim the resulting tax-saving charitable write-off. This strategy delivers a double tax benefit: You receive tax-saving capital losses plus a tax-saving itemized deduction for your charitable donations.
    • Appreciated stocks. For taxable investments that are currently worth more than they cost, you can donate the stock directly to a charity. Contributions of publicly traded shares that you’ve owned for over a year result in a charitable deduction equal to the current market value of the shares at the time of the gift. Plus, when you donate appreciated investments, you escape any capital gains taxes on those shares. This strategy also provides a double tax benefit: You avoid capital gains tax and you get a tax-saving itemized deduction for charitable contributions.

Time is running out

The ideas described above are only a few of the strategies that still may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2023.

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If you have a tax-saving flexible spending account (FSA) with your employer to help pay for health or dependent care expenses, there’s an important date coming up. You may have to use the money in the account by year-end or you’ll lose it (unless your employer has a grace period).

As the end of 2023 gets closer, here are some rules and reminders to keep in mind.

Health Flexible Spending Account 

A pre-tax contribution of $3,050 to a health FSA is permitted in 2023. This amount will be increasing to $3,200 in 2024. You save taxes in these accounts because you use pre-tax dollars to pay for medical expenses that might not be deductible. For example, expenses won’t be deductible if you don’t itemize deductions on your tax return. Even if you do itemize, medical expenses must exceed a certain percentage of your adjusted gross income in order to be deductible. Additionally, the amounts that you contribute to a health FSA aren’t subject to FICA taxes.

Your employer’s plan should have a list of qualifying items and any documentation from a medical provider that may be needed to get reimbursed for these expenses.

FSAs generally have a “use-it-or-lose-it” rule, which means you must incur qualifying medical expenditures by the last day of the plan year (December 31 for a calendar year plan) — unless the plan allows an optional grace period. A grace period can’t extend beyond the 15th day of the third month following the close of the plan year (March 15 for a calendar year plan).

What if you don’t spend the money before the last day allowed? You forfeit it.

Take a look at your year-to-date expenditures now. It will show you what you still need to spend. What are some ways to use up the money? Before year end (or the extended date, if permitted), schedule certain elective medical procedures, visit the dentist or buy new eyeglasses.

Dependent care Flexible Spending Account 

Some employers also allow employees to set aside funds on a pre-tax basis in dependent care FSAs. A $5,000 maximum annual contribution is permitted ($2,500 for a married couple filing separately).

FSAs are for:

• A child who qualifies as your dependent and who is under age 13, or
• A dependent or spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the tax year.

Like health FSAs, dependent care FSAs are subject to a use-it-or-lose-it rule, but the grace period relief may apply. Therefore, it’s a good time to review your expenses to date.

Other rules and exceptions may apply. Your HR department can answer any questions about your specific plan. Contact us with any questions you have about the tax implications.

© 2023

The IRS recently announced various 2024 inflation-adjusted federal tax amounts that affect individual taxpayers.

Most of the federal income tax rate bracket thresholds are about 5.4% higher than for 2023. That means that you can generally have about 5.4% more income next year without owing more to the federal government.

Standard deduction 

Here are the inflation-adjusted standard deduction numbers for 2024 for those who don’t itemize:

• $14,600 if you’re single or use married filing separate status (up from $13,850 in 2023).
• $29,200 if you’re married and file jointly (up from $27,700).
• $21,900 if you’re a head of household (up from $20,800).

Older taxpayers and those who are blind are entitled to additional standard deduction allowances. In 2024 for those age 65 or older or blind, the amounts will be: $1,550 for a married taxpayer (up from $1,500 in 2023) and $1,950 for a single filer or head of household (up from $1,850 for 2023).

For an individual who can be claimed as a dependent on another taxpayer’s return, the 2024 standard deduction will be the greater of: 1) $1,300 (up from $1,250 for 2023) or 2) $450 (up from $400 for 2023) plus the individual’s earned income, not to exceed $14,600 (up from $13,850 for 2023).

Ordinary income and short-term capital gains

Here are the 2024 inflation-adjusted bracket thresholds for ordinary income and net short-term capital gains:

• 10% tax bracket: $0 to $11,600 for singles, $0 to $23,200 for married joint filers, $0 to $16,550 for heads of household;
• Beginning of 12% bracket: $11,601 for singles, $23,201 for married joint filers, $16,551 for heads of household;
• Beginning of 22% bracket: $47,151 for singles, $94,301 for married joint filers, $63,101 for heads of household;
• Beginning of 24% bracket: $100,526 for singles, $201,051 for married joint filers, $100,501 for heads of household;
• Beginning of 32% bracket: $191,951 for singles, $383,901 for married joint filers, $191,951 for heads of household;
• Beginning of 35% bracket: $243,726 for singles, $487,451 for married joint filers and $243,701 for heads of household; and
• Beginning of 37% bracket: $609,351 for singles, $731,201 for married joint filers and $609,351 for heads of household.

Long-term capital gains and dividends

Here are the 2024 inflation-adjusted bracket thresholds for net long-term capital gains and qualified dividends:

• 0% tax bracket: $0 to $47,025 for singles, $0 to $94,050 for married joint filers, and $0 to $63,000 for heads of household;
• Beginning of 15% bracket: $47,026 for singles, $94,051 for married joint filers, and $63,001 for heads of household; and
• Beginning of 20% bracket: $518,901 for singles, $583,751 for married joint filers and $551,351 for heads of household.

Gift and estate tax

The annual exclusion for gifts made in 2024 will be $18,000 (up from $17,000 for 2023). That means you can give away up to $18,000 to as many individuals as you wish without incurring gift tax or using up any of your unified federal gift and estate tax exemption.

In 2024, the unified federal gift and estate tax exemption will be $13,610,000 (up from $12,920,000 for 2023).

For gifts made in 2024, the annual exclusion for gifts to a noncitizen spouse will be $185,000 (up from $175,000 in 2023).

Conclusion

This article only covers some of the inflation-adjusted tax amounts. There are others that may potentially apply, including: alternative minimum tax parameters, kiddie tax amounts, limits on the refundable amount of the Child Tax Credit, limits on the adoption credit, IRA contribution amounts, contributions to your company’s retirement plan and health savings account amounts. Various other inflation-adjusted amounts may affect your tax situation if you own an interest in a sole proprietorship or a pass-through business. Contact us with questions.

© 2023

If you’re facing a serious cash shortfall, one possible solution is to take an early withdrawal from your traditional IRA. That means one before you’ve reached age 59½. For this purpose, traditional IRAs include simplified employee pension (SEP-IRA) and SIMPLE-IRA accounts.

Here’s what you need to know about the tax implications, including when the 10% early withdrawal penalty tax might apply.

Penalty may be avoided 

In almost all cases, all or part of a withdrawal from a traditional IRA will constitute taxable income. The taxable percentage depends on whether you’ve made any nondeductible contributions to your traditional IRAs. If you have, each withdrawal from a traditional IRA consists of a proportionate amount of your total nondeductible contributions. That part is tax-free. The proportionate amount of each withdrawal that consists of deductible contributions and accumulated earnings is taxable. If you’ve never made any nondeductible contributions, 100% of a withdrawal is taxable.

Wide variety of exceptions 

Unless one of these 11 exceptions applies, there will be a 10% early withdrawal penalty tax on the taxable portion of a traditional IRA withdrawal taken before age 59½.

1. Substantially equal periodic payments (SEPPs). These are annual annuity-like withdrawals that must be taken for at least five years or until the you reach age 59½, whichever comes later. Because the SEPP rules are complicated, consult with us to avoid pitfalls.

2. Withdrawals for medical expenses. If you have qualified medical expenses in excess of 7.5% of your adjusted gross income, the excess is exempt from the penalty tax.

3. Higher education expense withdrawals. Early withdrawals are penalty-free to the extent of qualified higher education expenses paid during the same year.

4. Withdrawals for health insurance premiums while unemployed. This exception is available to an IRA owner who has received unemployment compensation payments for 12 consecutive weeks under any federal or state unemployment compensation law during the year in question or the preceding year.

5. Birth or adoption withdrawals. Penalty-free treatment is available for qualified birth or adoption withdrawals of up to $5,000 for each eligible event.

6. Withdrawals for first-time home purchases. Penalty-free withdrawals are allowed to an account owner within 120 days to pay qualified principal residence acquisition costs, subject to a $10,000 lifetime limit.

7. Withdrawals by certain military reservists. Early withdrawals taken by military reserve members called to active duty for at least 180 days or for an indefinite period are exempt from the 10% penalty.

8. Withdrawals after disability. Early withdrawals taken by an IRA owner who is physically or mentally disabled to the extent that the owner cannot engage in his or her customary gainful activity or a comparable gainful activity are exempt from the penalty tax. The disability must be expected to lead to death or be of long or indefinite duration.

9. Withdrawals to satisfy certain IRS debts. This applies to early IRA withdrawals taken to pay IRS levies against the account.

10. Withdrawals after death. Withdrawals taken from an IRA after the account owner’s death are always exempt from the 10% penalty. However, this exemption isn’t available for funds rolled over into the surviving spouse’s IRA or if the surviving spouse elects to treat an IRA inherited from the deceased spouse as the spouse’s own account.

11. Penalty-free withdrawals for emergencies coming soon. The SECURE 2.0 law adds a new exception for certain distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergencies. Only one distribution of up to $1,000 is permitted a year and a taxpayer has the option to repay it within three years. This provision is effective for distributions made after December 31, 2023.

Plan ahead 

Since most or all of an early traditional IRA withdrawal will probably be taxable, it could push you into a higher marginal federal income tax bracket. You may also owe the 10% early withdrawal penalty and possibly state income tax too. Note that the penalty tax exceptions generally have additional requirements that we haven’t covered here. Contact us for more details.

© 2023

Restricted stock awards are a popular way for companies to offer equity-oriented executive compensation. Some businesses offer them instead of stock option awards. The reason: Options can lose most or all of their value if the price of the underlying stock takes a dive. But with restricted stock, if the stock price goes down, your company can issue you additional restricted shares to make up the difference.

Restricted stock basics

In a typical restricted stock deal, you receive company stock subject to one or more restrictions. The most common restriction is that you must continue working for the company until a certain date. If you leave before then, you forfeit the restricted shares, which are usually issued at minimal or no cost to you.

To be clear, the restricted shares are transferred to you, but you don’t actually own them without any restrictions until they become vested.

Tax rules for awards 

What are the tax implications? You don’t have any taxable income from a restricted share award until the shares become vested — meaning when your ownership is no longer restricted. At that time, you’re deemed to receive taxable compensation income equal to the difference between the value of the shares on the vesting date and the amount you paid for them, if anything. The current federal income tax rate on compensation income can be as high as 37%, and you’ll probably owe an additional 3.8% net investment income tax (NIIT). You may owe state income tax too.

Any appreciation after the shares vest is treated as capital gain. So, if you hold the stock for more than one year after the vesting date, you’ll have a lower-taxed long-term capital gain on any post-vesting-date appreciation. The current maximum federal rate on long-term capital gains is 20%, but you may also owe the 3.8% NIIT and possibly state income tax.

Special election to be currently taxed

If you make a special Section 83(b) election, you’ll be taxed at the time you receive your restricted stock award instead of later when the restricted shares vest. The income amount equals the difference between the value of the shares at the time of the restricted stock award and the amount you pay for them, if anything. The income is treated as compensation subject to federal income tax, federal employment taxes and state income tax, if applicable.

The benefit of making the election is that any subsequent appreciation in the value of the stock is treated as lower-taxed, long-term capital gain if you hold the stock for more than one year. Also, making the election can provide insurance against higher tax rates that might be in place when your restricted shares become vested.

The downside of making the election is that you recognize taxable income in the year you receive the restricted stock award, even though the shares may later be forfeited or decline in value. If you forfeit the shares back to your employer, you can claim a capital loss for the amount you paid for the shares, if anything.

If you opt to make the election, you must notify the IRS either before the restricted stock is transferred to you or within 30 days after that date. We can help you with election details.

Important decision 

The tax rules for restricted stock awards are pretty straightforward. The major tax planning consideration is deciding whether or not to make the Section 83(b) election. Consult with us before making that call.

© 2023

If you’re fortunate to have an employer that offers a 401(k) plan, and you don’t contribute to it, you may wonder if you should participate. In general, it’s a great tax and retirement saving deal! These plans help an employee accumulate a retirement nest egg on a tax-advantaged basis. If you’re thinking about contributing to a plan at work, here are some of the advantages.

With a 401(k) plan, you can opt to set aside a certain amount of your wages in a qualified retirement plan. By electing to set cash aside in a 401(k) plan, you’ll reduce your gross income and defer tax on the amount until the cash (adjusted by earnings) is distributed to you in the future. It will either be distributed from the plan or from an IRA or other plan that you roll your proceeds into after leaving your job.

Tax benefits

Your wages or other compensation will be reduced by the pre-tax contributions that you make, which will save you current income taxes. But the amounts will still be subject to Social Security and Medicare taxes. If your employer’s plan allows, you may instead make all, or some, contributions on an after-tax basis. These are Roth 401(k) contributions. With Roth 401(k) contributions, the amounts will be subject to current income taxation, but if you leave these funds in the plan for a required time, distributions (including earnings) will be tax-free.

Your elective contributions — either pre-tax or after-tax — are subject to annual IRS limits. In 2023, the maximum amount permitted is $22,500. When you reach age 50, if your employer’s plan allows, you can make additional “catch-up” contributions. In 2023, that additional amount is up to $7,500. So if you’re 50 or older, the total that you can contribute to all 401(k) plans in 2023 is $30,000. Total employer contributions, including your elective deferrals (but not catch-up contributions), can’t exceed 100% of compensation or, for 2023, $66,000, whichever is less.

In a typical plan, you’re permitted to invest the amount of your contributions (and any employer matching or other contributions) among available investment options that your employer has selected. Periodically review your plan investment performance to determine that each investment remains appropriate for your retirement planning goals and your risk specifications.

Taking withdrawals

Another important characteristic of these plans is the limitation on withdrawals while you’re working. Amounts in the plan attributable to elective contributions aren’t available to you before one of the following events:

• Retirement (or other separation from service),
• Reaching age 59½,
• Disability,
• Plan termination, or
• Hardship.

Eligibility rules for a hardship withdrawal are strict. A hardship distribution must be necessary to help deal with an immediate and heavy financial need.

As an alternative to taking a hardship or other plan withdrawal while employed, your employer’s plan may allow you to receive a loan, which you pay back to your account with interest.

Matching contributions

Employers may opt to match 401(k) contributions up to a certain amount. Although matching is not required, surveys show that most employers offer some type of match. If your employer matches contributions, you should make sure to contribute enough to receive the full amount. Otherwise, you’ll lose out on free money!

These are just the basics of 401(k) plans for employees. For more information, contact your employer. Of course, we can answer any tax questions you may have.

© 2023