About Duane Morris LLP

Duane Morris LLP, a law firm with more than 900 attorneys in offices across the United States and internationally, is asked by a broad array of clients to provide innovative solutions to today’s legal and business challenges. Evolving from a partnership of prominent lawyers in Philadelphia over a century ago, Duane Morris’ modern organization stretches from the U.S. to the U.K. and across Asia. Throughout this global expansion, Duane Morris has remained committed to preserving its collegial, collaborative culture that has attracted many talented attorneys. The firm’s leadership, and outside observers like the Harvard Business School, believe this culture is truly unique among large law firms and helps account for the firm continuing to prosper throughout changing economic and industry conditions. Most recently, Duane Morris has been recognized by BTI Consulting as both a client service leader and a highly recommended law firm. Additionally, multiple Duane Morris offices have received recognition as top workplaces for consecutive years.

At a Glance

• Offices in 24 U.S. cities in 13 states and the District of Columbia
• Offices in Asia and the United Kingdom, and liaisons in Latin America
• More than 1,600 people
• More than 900 lawyers
• AM Law 100 since 2001

In addition to legal services, Duane Morris is a pioneer in establishing independent affiliates providing nonlegal services to complement and enhance the representation of our clients. The firm has independent affiliates employing more than 100 professionals engaged in other disciplines, such as the tax, accounting and litigation consulting services offered by the Tax Accounting Group.

About the Tax Accounting Group

Approaching our 45th anniversary, the Tax Accounting Group (TAG) was the first ancillary practice of Duane Morris LLP and is one of the largest tax, accounting and litigation consulting groups affiliated with any law firm in the United States. TAG has an active and diverse practice with over 60 service lines in more than 45 industries, serving as the entrusted adviser to clients in nearly every U.S. state and 25 countries through our regional access, national presence and global reach. In addition, TAG continues to enjoy impressive growth year over year, in large part because of our clients’ continued expression of confidence and referrals. To learn more about our service lines and industries served, please refer to our Quick Reference Service Guide.

TAG’s certified public accountants, certified fraud examiners, attorneys, financial consultants and advisers provide a broad range of cost-effective tax compliance, planning and consulting services as well as accounting, financial and management advisory services to individuals, businesses, estates, trusts and nonprofit organizations. TAG also provides an array of litigation consulting services to lawyers and law firms representing clients in regulatory and transactional matters and throughout various stages of litigation. Our one-of-a-kind CPA and lawyer platform allows us to efficiently deliver one-stop flexibility, customization and specialization to meet each of the traditional, advanced and unique needs of our clients, all with the convenience of a single-source provider.

We serve clients of all types and sizes, from high-net-worth individuals to young and emerging professionals, corporate executives to entrepreneurs, multigenerational families to single and multifamily offices, mature businesses to startups, global professional service firms to local companies, and foundations and nonprofits to governmental entities. We assist clients with a wide range of services, from traditional tax compliance to those with complex and unique needs, conventional tax planning to advanced strategies, domestic to international tax matters for clients working abroad as well as foreign businesses and individuals working in the United States, traditional civil tax representation to those criminally charged, those in need of customary accounting, financial and management advisory services, to those requiring innovative consulting solutions and those in need of sophisticated assistance in regulatory and transactional matters and throughout various stages of litigation.

With our service mission to enthusiastically provide effective solutions that exceed client expectations, and the passion, objectivity and deep experience of our talented professionals, including our dedicated senior staff with an average of over 25 years working together as a team at TAG (with a few having more than 30 years on our platform), TAG is truly distinctive. Being “truly distinctive and positively effective” is not just our TAGline, it is our way of life.

Whether you are a client new to TAG or are among the many who have been with us the entire 40-plus years, it is our honor and privilege to serve you.

From an economic and tax point of view, in many ways 2023 represented a return to normalcy. As we approach year-end, we are again fielding calls, outreaches and multiyear tax modeling requests from existing and new clients regarding year-end tax planning strategies available to individuals, businesses, estates, trusts and nonprofits. Without any major new tax legislation in 2023, we have gained quite a bit of certainty over future tax rates and provisions for the short term. With a divided Congress, not many tax provisions are currently in discussion, aside from several family-oriented provisions, a few business provisions such as the potential extension of 100 percent bonus depreciation and enhancements to the business interest expense deduction, and the possible elimination/reduction of the $10,000 cap on state and local tax deduction. While this clarity extends through 2024, with such an evenly split electorate, potential shifts in the White House and Congress in early 2025 loom.

In addition, and potentially even more important, we are just two short years away from the sunsetting of many provisions passed or modified under the Tax Cuts and Jobs Act of 2017 (TCJA). With the clock is ticking on provisions of the TCJA, the largest overhaul of the tax code in decades, many pieces of this legislation are scheduled to sunset in 2025.

These provisions include but are not limited to:

• Lower marginal individual income tax rates;
• Nearly doubled standard deductions;
• Elimination of the personal exemption;
• Child tax credit doubling to $2,000, with an increased income threshold;
• State and local income tax deduction limitation of $10,000;
• Reduction of mortgage interest deduction from $1 million of debt to $750,000;
• Higher AMT exemptions and income thresholds, which dramatically decreased the impact of the individual AMT;
• Qualified business income (QBI/199A) deduction of 20 percent;
• Doubling of the estate and gift exclusion amount;
• Deferring gains through qualified opportunity zones; and
• Establishment of an employer credit for paid family and medical leave.

With so many tax provisions set to expire in such a short time, the next administration and Congress will have their hands full in negotiating the extension and modification of these and other provisions. At the moment, the most likely outcome seems that the TCJA could simply expire because our politicians fail to reach agreement on how to extend or modify it. As a result, it seems reasonable to at least plan for the possibility that taxes will be higher in the future (starting as early as 2026). It’s never too early to think about the future.

While you can depend on TAG for cost-effective tax compliance, planning and consulting services, as well as critical advocacy and prompt action in connection with your long-term personal and business objectives, we are also available for any immediate or last-minute needs you may have or those that Congress may legislate that impact your personal or business tax situation.

With only minor tax changes expected for 2024, the tried-and-true strategy of deferring income and accelerating deductions may be beneficial in reducing tax obligations for most taxpayers in 2023. With minor exceptions, this month is the last chance to develop and implement your tax plan for 2023, but it is certainly not the last opportunity.

For example, if you expect to be in the same tax bracket in 2024 as 2023, deferring taxable income and accelerating deductible expenses can possibly achieve overall tax savings for both 2023 and 2024. However, by reversing this technique and accelerating 2023 taxable income and/or deferring deductions to plan for a possible higher 2024 tax rate, your two-year tax savings may be higher. This may be an effective strategy for you if, for example, you have charitable contribution carryovers to absorb, your marital status will change next year or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation. Examine our “Words of Caution” section below for additional thoughts in this regard.

This guide provides tax planning strategies for corporate executives, businesses, individuals, including high-income and high-wealth families, nonprofit entities and trusts. We hope that this guide will help you leverage the tax benefits available to you presently, reinforce the tax savings strategies you may already have in place, or develop a tax-efficient plan for 2023 and 2024.

To help you prepare for an uncertain year-end, below is a quick reference guide of action steps, organized by several common individual scenarios, which can help you reach your tax-minimization goals as long as you act before the clock strikes midnight on New Year’s Eve. Not all of the action steps will apply in your particular situation, but you could likely benefit from many of them. Taxpayers may want to consult with us to develop and tailor a customized plan with defined multiyear tax modeling to focus on the specific actions that you are considering. We will be pleased to help you analyze the options and decide on the strategies that are most effective for you, your family and your business.

Whether you should accelerate taxable income or defer deductions between 2023 and 2024 largely depends on your projected highest (aka marginal) tax rate for each year. While the highest official marginal tax rate for 2023 is currently 37 percent, you might pay more tax than in 2022 even if you were in a higher tax bracket due to credit fluctuations, compositions of capital gains and dividends, and a myriad of other reasons.

The chart below summarizes the most common 2023 tax rates together with the corresponding taxable income levels presently in place. Effective management of your tax bracket can provide meaningful tax savings, as a change of just $1 in taxable income can shift you into the next higher or lower bracket. These differences can be further exacerbated by other income thresholds throughout the Internal Revenue Code, discussed later in this guide, such as those for determining eligibility for the child tax credit and qualified business income deductions, among others. Income deferral and acceleration, while being mindful of bracket thresholds, can be accomplished through numerous income strategies discussed in this guide, such as retirement distribution planning, bonus acceleration or deferral, and harvesting of capital gains and losses.

2023 Federal Income Tax Rate Schedule

Tax Rate	Single	Head of Household	Married Couple
10%	$0 - $11,000	$0 - $15,700	$0 - $22,000
12%	$11,001 - $44,725	$15,701 - $59,850	$22,001 - $89,450
22%	$44,726 - $95,375	$59,851 - $95,350	$89,451 - $190,750
24%	$95,376-$182,100	$95,351 - $182,100	$190,751 - $364,200
32%	$182.101 - $231,250	$182,101 - $231,250	$364,201 - $462,500
35%	$231,251 - $578,125	$231,251 - $578,100	$462,501 - $693,750
37%	Over $578,125	Over $578,100	Over $693,750

 

While reviewing this guide, please keep the following in mind:

• Never let the tax tail wag the financial dog, as we often preach. Always assess economic viability. This guide is intended to help you achieve your personal and business financial objectives in a “tax efficient” manner. It is important to note that proposed transactions should make economic sense in addition to generating tax savings. Therefore, you should review your entire financial position prior to implementing changes. Various nontax factors can influence your year‑end planning, including a change in employment, your spouse reentering or exiting the work force, the adoption or birth of a child, a death in the family or a change in your marital status. It is best to look at your tax situation for at least two years at a time with the objective of reducing your tax liability for both years combined, not just for 2023. In particular, multiple years should be considered when implementing “bunching” or “timing” strategies, as discussed throughout this guide.
• Be very cautious about accelerated timing causing you to lose too much value, including the time value of money. That is, any decision to save taxes by accelerating income must consider the possibility that this means paying taxes on the accelerated income earlier, which would require you to forego the use of money used to satisfy tax liabilities that could have been otherwise invested. Accordingly, the time value of money can make a bad decision worse or, hopefully, a good decision better―a delicate balance, indeed.
• While the traditional strategies of deferring taxable income and accelerating deductible expenses will be beneficial for many taxpayers, with exceptions, you can often achieve overall tax efficiency by reversing this technique. For example, waiting to pay deductible expenses such as mortgage interest until 2024 would defer the tax deduction to 2024. Or, waiting to pay state and local taxes (SALT) until 2024 if you have already paid SALT of $10,000 in 2023 could also be worthwhile. You should consider deferring deductions and accelerating income if you expect to be in a higher tax bracket next year, you have charitable contribution carryovers to absorb, your marital status will change next year or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation.
• Both individuals and businesses have many ways to “time” income and deductions, whether by acceleration or deferral. Businesses, for example, can make different types of elections that affect the timing of significant deductions. Faster or slower depreciation, including electing in or out of bonus depreciation, is one of the most significant. This type of strategy should be considered carefully as it will not simply defer a deduction into the following year but can push the deduction out much further or spread it over a number of years.

With these words of caution in mind, the following are observations and specific strategies that can be employed in the waning days of 2023 regarding income and deductions for the year, where the tried-and-true strategies of deferring taxable income and accelerating deductible expenses will result in maximum tax savings.

As we mentioned last year, with the passage of the Inflation Reduction Act in 2022, the IRS received a budget increase of approximately $80 billion over a 10-year period. This past year, the IRS has focused on catching up on processing of backlog returns, payments and letters due to lingering delays caused by the pandemic. As IRS operations shift focus from catch-up processing to enforcement efforts, new compliance efforts are being outlined by the IRS, targeting upper-income taxpayers. On September 8, 2023, the IRS announced plans to roll out new audit initiatives targeting America’s wealthiest taxpayers, including high-income and high-wealth individuals, partnerships and large corporations as well as abusive tax shelters pushed by promoters stretching the limits of legality.

This initiative was designed to increase scrutiny and ultimately increase attention and audit activity on these taxpayers who over the past decade saw sharp drops in audit rates (despite the modest reported increase between 2022 and 2021). The scrutiny will be driven with the aid of increased technology and the use of artificial intelligence to help IRS compliance teams to better detect those taxpayers to be audited.

The key focus of this effort will purportedly include:

1. Taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. The IRS plans to have dozens of revenue officers focusing on the collection of these tax debts.
2. The opening of 75 examinations of the largest partnerships in the U.S. that represent a cross section of industries that include hedge funds, real estate investment partnerships, publicly traded partnerships and law firms, including large partnership returns with ongoing discrepancies on balance sheets, which is an indicator of noncompliance.
3. The launch of numerous compliance efforts focusing on abusive microcaptive insurance arrangements, syndicated conservation easement abuses as well as expanding efforts involving digital assets and Foreign Bank and Financial Accounts reporting violations.

Less than a week later, on September 14, 2023, the IRS halted processing of new employee retention credit claims amidst concerns over “questionable claims” and announced a process allowing business to withdraw these claims before they are processed. For more information, see our discussion later at item 12.

Finally, on September 20, 2023, the IRS announced plans to establish a new special enforcement team to focus on large or complex pass-through entities. The new unit will be a part of the IRS Large Business and International Division and staffed, in part, by new people joining the IRS under the new agency hiring initiative of more than 3,700 positions being added nationwide. Targeting high-income individuals remains a high priority for IRS, which we discuss in greater detail in our December 12, 2023, Alert.

For those high- and ultra-high-net-worth individuals, businesses and others (including those noted throughout this guide, such as cryptocurrency and digital asset owners) who are targeted groups in recent or new IRS compliance initiatives, the time to develop a plan and maintain documentation is now. In advance of any IRS examination, you may wish to work with experienced tax counsel to conduct a simulated audit to assess exposure and mitigate risk. We recommend that those taxpayers with exposure engage truly independent tax lawyers and CPAs who fall under attorney-client privilege to represent your interests, such as those in our National Tax Controversy Group. For more information on our National Tax Controversy Group and how to prepare yourself for an audit, see our prior Alert.

Below is a quick and easy reference guide of action steps that can help you reach your tax-minimization goals, as long as you act before year-end. In this guide, we have identified the best possible action items for you to consider, depending on how your income shapes up as the year draws to a close.

Not all of the action steps will apply in your particular situation, and some may be better for you than others. In addition, several steps can be taken before year-end that are not necessarily “quick and easy” but could yield even greater benefits. For example, perhaps this is the year that you finally set up your private foundation to achieve your charitable goals (see item 112) or maybe you decide it is time to review your estate plan in order to utilize the current unified credit (see items 115-130). Consultation to develop and tailor a customized plan focused on the specific actions that should be taken is paramount.

To help guide your thinking and planning in light of the multiple situations in which you may find yourself at year-end, we have compiled Quick-Strike Action Steps that follow different themes depending on several common situations. Due to the changing legislative environment, you may wish to consider several situations below and identify the most relevant and significant steps for your particular situation.

Quick-Strike Action Step Themes

Situation	Reason	Theme	Action
You expect higher ordinary tax rates in 2024	Increased income Getting married, subject to marriage penalty	Accelerate income into 2023 Defer deductions until 2024	Accelerate installment sale gain into 2023 (item 105) Defer SALT payments to 2024 (item 20) Bunch itemized deductions (item 22)
You expect lower ordinary tax rates in 2024	Retirement Income goes down	Accelerate deductions into 2023 Defer income until 2024	Defer income until 2024 (item 14) Maximize medical deductions in 2023 (item 19) Prepay January mortgage (item 21) Consider deduction limits for charitable contributions (items 23 and 24) Sell passive activities (item 40) Increase basis in partnership and S corporation to maximize losses (item 41) Maximize pre-tax retirement contributions (item 43) Maximize contributions to FSAs and HSAs (items 55 and 56)
You have high capital gains in 2023	Business or property sold An investment ends Employee stock is sold	Reduce or defer gains	Invest in qualified opportunity zones (item 7) Invest in 1202 small business stock (item 29) Perform a like-kind exchange (item 37) Harvest losses (item 28)
You have low capital gains in 2023	Carry forward losses	Increase capital gains	Maximize preferential gains rates (item 26)

1. Enjoy another year of reprieve from Form 1099-K reporting for users of Venmo, PayPal, CashApp, Uber, Doordash and Airbnb users. While Forms 1099-K were initially required to be issued for calendar year 2021 and after when gross payment card transactions for goods or services exceeded $600, the IRS has once again delayed implementation of this rule. For 2023, e-commerce companies will only be required to issue 1099-Ks based upon the old filing threshold of $20,000 in gross amounts and more than 200 transactions in a calendar year. For 2024, the IRS expects to lower the threshold to $5,000.

2. Take advantage of a 529 to Roth rollover in 2024. Beginning in 2024, the SECURE ACT 2.0 permits beneficiaries of 529 college savings accounts to make up to $35,000 of direct trustee-to-trustee rollovers from a 529 account to their Roth IRA without tax or penalty. In order to qualify, two requirements must be met:

1. The 529 account must have been open for more than 15 years; and
2. The rollover must consist of amounts contributed to the 529 account more than five years prior to the conversion, plus earnings on those contributions.

Additionally, rollovers are subject to the Roth IRA annual contribution limits, but they are not limited based on the taxpayer's adjusted gross income (AGI). Therefore, if a married couple has earned income in 2024 of at least $6,500, they can begin transferring up to the annual contribution limit ($6,500) form the 529 plan account to a Roth IRA, assuming the other provisions are met above. They can make these rollover contributions each year until they max out at the lifetime cap of $35,000.

3. Familiarize yourself with the Inflation Reduction Act’s new energy tax credits. The Inflation Reduction Act of 2022, which became law in August 2022, changed our energy credit landscape for the next decade. Please see item 62 for a chart summarizing these credits. Some tax credits that may be of interest to individuals and small businesses include:

Energy Efficient Home Improvement Credit

Previously named the nonbusiness energy property credit, this credit has been extended through 2032. The credit is available to taxpayers who made qualifying, energy-efficient improvements to their homes. Beginning in 2023, the available credit is 30 percent of the costs of all eligible home improvements made during the year. The lifetime limit under the old law has been replaced with a $1,200 annual limit, which took effect January 1, 2023.

Residential Clean Energy Credit

Previously named the residential energy efficient property credit, this credit was scheduled to sunset at the end of 2023 but has now been extended through 2034. The credit is available for taxpayers who installed solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump and biomass fuel property in their homes. The Inflation Reduction Act increased the maximum percentage available for the credit to 30 percent for property placed in service after December 31, 2021, and before January 1, 2033, after which it will phase down to 26 percent for 2033 and 22 percent for 2034. While the credit is no longer be available for installations of biomass heaters and furnaces that were previously eligible, in 2023 the credit expanded to include battery storage technology that meets certain capacity requirements.

New Energy Efficient Home Credit

A credit designed for eligible contractors who build or substantially reconstruct qualified new energy-efficient homes has also been extended and enhanced under the Inflation Reduction Act. The available credit for homes acquired in 2023 through 2032 can range between $500 to $5,000 depending on the energy savings and efficient requirements being satisfied.

4. Plan for the new and expanded electric vehicle tax credits. In addition to the home-related energy credits detailed in the previous section, the Inflation Reduction Act also introduced or extended several numerous credits related to vehicles for 2023:

New Clean Vehicle Credit

Previously named the qualified plug-in electric drive motor vehicle credit, this credit was available for each new plug-in electric drive motor vehicle placed in service. In addition to extending the credit through 2032, the act eliminates phaseout rules determined by the manufacture’s sales and stipulates that the final assembly of the vehicle must take place in North America.

Credit for Previously Owned Clean Vehicles

This credit is allowed for any previously owned clean vehicle purchased and placed into service in 2023 until 2032 and is limited to the lesser of $4,000 or 30 percent of the vehicle’s sale price. The credit is disallowed if the buyer meets certain income thresholds, as well as a $25,000 maximum price paid for the vehicle.

New Credit for Qualified Commercial Clean Vehicles

This credit is new and available for any qualifying vehicles acquired and placed in service before December 31, 2032. The maximum credit is impacted by the vehicle’s weight, as vehicles in excess of 14,000 pounds can receive a maximum credit of $40,000, while lighter vehicles are limited to $7,500. The credit for each vehicle is the lesser of either: (1) 15 percent of the vehicle’s basis (30 percent for vehicles not powered by gas or diesel); or (2) the “incremental cost” of the vehicle above what the price for a comparable gas- or diesel-powered vehicle would be.

If you are in the market for an electric vehicle, it will be important to have these discussions with your dealer to confirm your dealer is following all rules regarding the new clean vehicle credits.

5. Claim a deduction for casualty and disaster losses. Notably in 2023, California suffered major damage from last winter's severe storms, flooding and mudslides that led to a federally declared emergency in the state. On October 16, 2023, the IRS announced further tax relief for California’s severe winter storm victims that reside or have a business in the majority of the state of California pushing their various tax deadlines to November 16, 2023.

Massachusetts and Maine also endured damage from Hurricane Lee that resulted in a federally declared emergency and resulted in their various tax deadlines moving to February 15, 2024. In addition, other states had federally declared disasters for damages caused by other storms, floods and wild fires. If you have any questions about whether an event qualifies, please do not hesitate to ask for clarification.

For tax purposes, any losses attributed to a federally declared emergency in 2023 can be pushed back into 2022, such as the closure of stores, losses on mark-to-market securities and permanent retirement of fixed assets. However, lost revenues and the decline in fair market value of property as a direct result of economic hardships would not constitute a loss under disaster rules.

For victims of these disasters that have not yet filed their 2022 tax returns, these losses can be included with their 2022 returns filed prior to the extended filing deadline. Currently, taxpayers choosing to claim their losses on their 2022 returns have until of October 15, 2024, to make this election. For those that have already filed 2022 returns, it is still possible to go back and amend 2022 filings, especially if 2022 profits could be offset with 2023 disaster losses. The subject of disaster losses remains a very complicated matter, and there are many rules and stipulations that would prevent taxpayers from taking advantage of the election. There are also certain reasons why taxpayers would not want to make the election and, for these reasons, we recommend consulting with us or your qualified tax professional before delving into the amendment process.

6. Shine some light on solar projects to capitalize on the expanded credit. For the past two years, we have seen much interest in the expanded solar credits from our clients. With the passage of the Inflation Reduction Act in 2022, the solar investment tax credit was increased to 30 percent of eligible expenses for projects installed between 2022 and 2032. After 2032, this credit will drop to 26 percent of eligible expenses in 2033 and 22 percent in 2034.

7. Invest in qualified opportunity zones to defer capital gains for three years. Gains can be deferred on the sale of appreciated stock that is reinvested within 180 days into a qualified opportunity fund (QOF). This gain is deferred until the investment is sold or December 31, 2026, whichever is earlier. An individual is able to defer a capital gain as long as the property was sold to an unrelated party. In addition to the deferral of gain, once the taxpayer has held the QOF investment for five years, they are able to increase their basis in the asset by 10 percent of the original gain. Due to this five-year holding period requirement, the QOF investment must have been acquired by December 31, 2021, in order to benefit from this basis step-up.

Although the contribution deadline for this basis increase has passed, a QOF still provides taxpayers the ability to defer capital gains until 2026 or the year in which the investment is sold, whichever is earlier. In addition, tax on the appreciation of the QOF may be avoided if the investment is held for over 10 years.

All states have communities that now qualify. Besides investing in a fund, one can also take advantage of this opportunity by establishing a business in the qualified opportunity zone or by investing in qualified opportunity zone property.

8. Doing business in the United States? Prepare for beneficial ownership information reporting. The Corporate Transparency Act (CTA) of 2021 implemented uniform beneficial ownership information reporting requirements for corporations, limited liability companies and other business entities that were created in or are registered to do business in the United States, effective January 1, 2024. In a nutshell, the CTA will require owners of small companies to file a report with the Financial Crimes Enforcement Network (FinCEN) detailing basic information about the beneficial owners of the company, such as names, dates of birth, addresses and identifying numbers. Violations of the CTA and noncompliance with reporting requirements can have severe consequences (a $500-a-day penalty, up to $10,000, and up to two years’ imprisonment), so timely compliance is key.

So who is required to file a beneficial ownership information report, what information must be included and when does it need to be filed? The answer can be found in our June 13, 2023, Alert and December 7, 2023, Alert. Countless businesses are expected to be impacted, and if you assume you will not be affected, you may be risking severe penalties.

9. New corporate alternative minimum tax starting in 2023. To help pay for the many clean energy tax credits and incentives in the Inflation Reduction Act, a new corporate alternative minimum tax (AMT) was created, starting in 2023 with a 15 percent tax rate. Unlike the pre-2018 corporate alternative minimum tax, which was imposed on taxable income as adjusted, the new corporate alternative minimum tax is imposed on adjusted financial statement income.

Are You Subject to the New AMT?

The new AMT applies only to applicable corporations whose average annual adjusted financial statement income for the three-tax-year period ending with the current tax year exceeds $1 billion. However, special rules apply to members of a multinational group with a foreign parent, which cause the new AMT to apply if the average adjusted financial statement income for the corporation equals or exceeds $100 million. In addition, there are a number of aggregation rules, under which related businesses may be aggregated for purposes of the income test, including a rule that includes income of a partnership in which the corporation is a partner.

What Does Adjusted Financial Statement Income Include?

The new corporate AMT starts with the applicable financial statement, which is a certified statement prepared in accordance with general accepted accounting principles. Therefore, the start to the new corporate AMT will generally be Form 10-K filed with the SEC, or for nonregistrants, the latest annual audited financial statements. This financial statement income is then adjusted for the following items as detailed in the Inflation Reduction Act:

• Statements covering different tax years;
• Related entities―consolidated financial statements, consolidated returns and partnerships;
• Certain items of foreign income;
• Effectively connected income;
• Certain taxes;
• Disregarded entities;
• Cooperatives;
• Alaska native corporations;
• Payment of certain tax credits;
• Mortgage-servicing income;
• Defined benefit plans;
• Tax-exempt entities;
• Depreciation;
• Qualified wireless spectrum;
• Financial statement net operating loss; and
• Other items that the Treasury secretary may prescribe.

10. Plan for the new 1 percent excise tax on stock repurchases. The Inflation Reduction Act added a 1 percent excise tax on the value of corporate stock buybacks of publicly traded companies, which applies to tax years beginning after December 31, 2022. Only repurchases that are treated as redemptions for tax purposes are subject to the tax, and a $1 million exemption is provided. The IRS and Treasury Department have currently only released interim guidance on the excise tax. Proposed regulations have not yet been issued. Until proposed regulations are issued, taxpayers are not required to report or pay the excise tax until the first quarter after the proposed regulations have been issued. Due to this unknown timing, please stay in close contact with your tax advisers so you can immediately begin the reporting processes under the proposed regulations to meet this small filing window.

11. Avoid scams and file a valid employee retention or other expanded credit. Due to a growing number of scams and fraudulent activity surrounding the employee retention credit (ERC), the IRS placed an immediate moratorium on the processing of new ERC claims on September 14, 2023, to last until at least December 31, 2023. For employers who missed out on filing a valid ERC claim, there is still time to file an amended employment tax return. Generally, there is a three-year statute of limitations to file an amended return that begins when the original employment tax return was filed. However, with respect to quarterly employment tax returns filed in the second and third quarters of 2021, the statute of limitations was extended to five years. While the ERC was designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits throughout the COVID-19 pandemic, as the economic recovery progressed, the credit was no longer serving its original purpose and expired on October 1, 2021. In order to qualify for the credit, the business must have paid wages while its operations were either completely or partially suspended by government order or during a quarter in which receipts were down 20 percent or more over the same quarter in 2019. A business may also qualify as a recovery startup business that began operations after February 15, 2020.

Another credit, the family and medical leave credit, has been extended through 2025. In order to qualify for this credit, employers’ written policies must provide at least two weeks of paid leave for eligible full-time employees and paid leave must be at least 50 percent of wages paid during a normal workweek. The credit ranges from 12.5 percent to 25 percent of wages paid to qualified employees who are out for a maximum of 12 weeks during the year.

Finally, the work opportunity tax credit is a nonrefundable credit for employers who employ certain individuals from targeted groups, such as veterans, low-income individuals and ex-felons. The size of the credit depends on the hired person’s target group, the number of individuals hired and the wages paid to each. This credit is also scheduled to expire at the end of 2025.

12. Consider withdrawing erroneous employee retention credit claims. Aggressive ERC solicitors have been pushing businesses to submit aggressive and ineligible ERC claims for the past three years. With the increased funding the IRS has received as a result of the inflation Reduction Act of 2022, the IRS has turned its attention to enforcement in this area, resulting in several lawsuits against these unscrupulous promotors, both by the IRS and their clients. As of September 2023, the IRS had over 600,000 ERC claims waiting to be processed. With such a large amount in processing, and in order to give these claims more careful scrutiny, the IRS announced that no new claims will be processed until 2024, while claims submitted before September 14, 2023, continue to be reviewed within 90 to 180 days of receipt, or longer if additional review or audit is needed. Additionally, the IRS has implemented the ERC claim withdrawal process for taxpayers who filed an ineligible claim. Steps to request an ERC claim withdrawal depend on whether a refund check has been received or cashed and if the IRS has started an audit of your claim. This withdrawal process is available only if all of the following apply:

1. You filed an amended employment tax return to claim the ERC (Forms 941-X, 943-X, 944-X, CT-1X).
2. You made no other changes on your amended return besides claiming the ERC.
3. You intend to withdraw the entire amount of your ERC claim for the quarter.
4. You have yet to receive the refund checks for the claim, or you have not cashed or deposited the refund check if the IRS has already processed your returns and paid your claim.

You will receive a letter from the IRS stating whether the withdrawal request was accepted or rejected. Without the acceptance letter, the withdrawal request is not considered completed. If your withdrawal is accepted, an amended income tax return may need to be prepared.

13. Return to normal for charitable contribution limits for C corporations. Corporations are limited to charitable contributions of 10 percent of taxable income. COVID-19 legislation changed this rate to varying amounts for years 2020 to 2022, but those laws have expired and C corporation taxpayers now face the same historical 10 percent limitation for 2023 and forward.

Virtually any cash-basis taxpayer can benefit from strategies that accelerate deductions or defer income, since it is generally better to pay taxes later rather than sooner (especially when income tax rates are not scheduled to increase). For example, a check you send in 2023 generally qualifies as a payment in 2023, even if it is not cashed or charged against your account until 2024. Similarly, deductible expenses paid by credit card are not deductible when you pay the credit card bill (for instance, in 2024), but when the charge is made (for instance, in 2023).

With respect to income deferral, cash-basis businesses, for example, can delay year-end billings so that they fall in the following year or accelerate business expenditures into the current year. On the investment side, income from short-term (i.e., maturity of one year or less) obligations like Treasury bills and short-term certificates of deposit is not recognized until maturity, so purchases of such investments in 2023 will push taxability of such income into 2024. For a wage earner (excluding an employee-shareholder of an S corporation with a 50 percent or greater ownership interest) who is fortunate enough to be expecting a bonus, he or she may be able to arrange with their employer to defer the bonus (and tax liability for it) until 2024. However, if any of this income becomes available to the wage earner, whether or not cash is actually received, the bonus will be taxable in 2023. This is known as the constructive receipt doctrine.

14. Defer income until 2024 to take advantage of inflation adjustments to tax brackets. For 2023, the top individual tax rate remains 37 percent and is applied to joint filers with taxable income greater than $693,750 and single filers with taxable income greater than $578,125. These thresholds will rise in 2024 to $731,200 for joint filers and $609,350 for single filers. It might be advantageous for many taxpayers to accelerate their deductions into 2023, reducing their potential tax liability this year. Additionally, for those who are able, taxpayers should plan to defer income into 2024 to take full advantage of the threshold increases to the tax brackets. While there are many ways to defer your income, waiting to recognize capital gains or exercise stock options are popular options that would not only lower your investment income, but your taxable income as well. Depending on your situation, these strategies could reduce tax due for 2023 and potentially 2024 as well.

15. Be aware of the largest increase to the standard deduction since the Tax Cuts and Jobs Act. Thanks to high inflation adjustments for 2023, the standard deduction has increased meaningfully to $27,700 for a joint return (an increase of $1,800) and $13,850 for a single return (an increase of $900) for those who do not itemize deductions. Taxpayers age 65 or older and those with certain disabilities may claim additional standard deductions.

 

16. Carefully consider obtaining an IP PIN. The Identity Protection (IP) PIN is a six-digit number assigned by the IRS (and known only by the IRS and the taxpayer) that adds an additional layer of protection to the taxpayer’s sensitive tax information. Using an IP PIN prevents someone else from filing a return just by using your Social Security number or Individual Taxpayer Identification Number. Rather, the return must also include your unique IP PIN. Therefore, receiving and using an IP PIN will further protect your tax information whether you have previously been a victim of identity theft or just want to take precautions to plan ahead and avoid potential identity theft in the future. After you receive your IP PIN from the IRS, it is valid for one calendar year and must be renewed every year after. For greater detail, we previously wrote on this topic in an Alert. Additionally, the IRS has an FAQ about the IP PIN.

17. Maximize child and dependent care credits. For tax year 2023, you may be able to claim the nonrefundable child and dependent care credit if you pay qualified expenses when you (and your spouse if filing a joint return) work. This credit is generally not allowed for married filing separately taxpayers. Your dependent must be under age 13, or an individual who was physically or mentally incapable of self-care with certain conditions. The maximum qualifying expenses you may use to calculate the credit are $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. In 2023, there is no limit to a taxpayer’s AGI in qualifying for the credit; however, the percentage of expenses available for credit would be reduced to 20 percent for most middle-income taxpayers whose AGI exceeds $43,000.

Percentage of Expenses Available for Dependent Care Credit (Based on Income)

	35%	34% to 21%	20%
Adjusted gross income	$0 to $15,000	$15,001 to $43,000	$43,001 and above

18. Claim the maximum child tax credit. For 2023, the maximum credit remains at $2,000 per dependent under the age of 17. The refundable portion of the credit can go up to $1,600 per qualifying child (up from $1,500 in 2022 to adjust for inflation), depending on your income, and you must have earned income of at least $2,500 to even be eligible for the refund. Similar to 2022, the credit begins to phase out at incomes above $400,000 for married filing jointly taxpayers and $200,000 for any other filing status.

Phaseout Range of Child Tax Credit by Modified Adjusted Gross Income

Single/Married Filing Separately	Head of Household	Married Filing Jointly
$200,000 - $240,000	$200,000 - $240,000	$400,000 - $440,000

 

Itemized Deduction Planning

19. Pay any medical bills in 2023. The Consolidated Appropriations Act of 2021 permanently reduced the medical expense deduction floor to 7.5 percent of AGI. Additionally, the deduction is no longer an AMT preference item, meaning that even taxpayers who are subject to the AMT benefit from deductible medical expenses.

20. Defer your state and local tax payments until 2024. The limitation of the state and local tax deduction was one of the most notable changes enacted by the TCJA in 2017. In 2023, the deduction limit for state and local income or sales and property taxes of $10,000 per return ($5,000 in the case of a married individual filing separately) remains unchanged, though each year more and more states introduce measures to try and circumvent this limitation, such as pass-through entity (PTE) tax arrangements that will enable a deduction at the individual level. See the next observation below.

21. Prepay your January mortgage payment if you will be under the mortgage interest limitation. For acquisition indebtedness incurred after December 15, 2017, the mortgage interest deduction is limited to interest incurred on up to $750,000 of debt ($375,000 in the case of a married individual filing a separate return). The mortgage interest from both a taxpayer’s primary and secondary residences remains deductible up to this balance limit on newer debt. For debt existing prior to December 15, 2017, the limit remains at the pre-TCJA amount of $1 million for original mortgage debt.

Regardless of the date incurred, home equity indebtedness not used to substantially improve a qualified home is no longer deductible. However, if a portion of the funds taken from home equity indebtedness are used to improve the property, an equal percentage of the interest paid on that debt can be deducted.

22. Consider paying state and local taxes, mortgage interest, medical expenses, charitable gifts, etc. (subject to limits noted within this guide) in the same year as opposed to spreading the payments over two years. By bunching deductions and deferring taxable income along with using AGI‑reducing techniques, you increase the value of all deductions and reduce your overall tax liability.

In considering the strategies noted below, however, keep in mind that if you pay a deductible expense in December 2023 instead of January 2024, you reduce your 2023 tax instead of your 2024 tax, but you also lose the use of your money for one month. Generally, this will be to your advantage from a tax perspective, unless in one month you can generate a better return on use of the funds than the tax savings. In other words, you must decide whether the cash used to pay the expense early should be for something more urgent or more valuable than the increased tax benefit.

The following chart illustrates the tax treatment of selected types of interest.

Interest Expense Deduction Summary*

Type of debt	Not deductible	Itemized deduction	Business or above-the-line deduction
Consumer or personal	✔
Taxable investment [1]		✔
Qualified residence [2]		✔
Tax-exempt investment	✔
Trading and business activities			✔
Passive activities [3]			✔

 

^* Deductibility may be subject to other rules and restrictions.

[1] Generally limited to net investment income.

[2] For 2023, including debt of up to $750,000 ($1 million for debt incurred prior to December 16, 2017) associated with primary and one secondary residence. Home equity loan interest deduction is suspended, unless the loan proceeds are used to buy, build or substantially improve the taxpayer’s home securing the loan.

[3] Subject to passive activity rules.

Charitable Contributions

You may wish to consider paying 2024 pledges in 2023 to maximize the “bunching” effect, perhaps through a donor-advised fund, which is a charitable giving vehicle that can assist with “bunching” of charitable contributions into a given year. This can be useful when you are able to make a donation but have yet to determine the timing of the distributions out of the donor-advised fund or which charities will receive the gift.

In addition to achieving a large charitable impact in 2023, this strategy could produce a larger two-year deduction than two separate years of itemized deductions, depending on income level, tax filing status and giving amounts each year.

Investment Interest

This is interest on loans used to purchase or carry property held for investment purposes (e.g., interest on margin accounts, interest on debt used to purchase taxable bonds, stock, etc.). Investment interest is fully deductible to the extent of net investment income, unless incurred to purchase securities that produce tax-exempt income. Net investment income is equal to investment income less deductible investment expenses. Sources of investment income include income from interest, nonqualified dividends, rents and royalties. Investment expenses include depreciation, depletion, attorney fees, accounting fees and management fees. If you bunch your investment expenses in one year so that little or no investment interest is deductible, the nondeductible investment interest can be carried forward to the following year.

By rearranging your borrowing, you may be able to convert nondeductible interest to deductible investment interest. In addition, you may be able to increase your otherwise nondeductible investment interest by disposing of property that will generate a short‑term capital gain. The extra investment interest deduction may even offset the entire tax on the gain. Disposing of property that will generate long‑term capital gain will not increase your investment income unless you elect to pay regular income tax rates on the gain. Accordingly, you should review your debt and investment positions before disposing of such property.

Medical and Dental Expenses

As discussed in item 19 above, a medical deduction is allowed only to the extent that your unreimbursed medical outlays exceed 7.5 percent of your AGI. To exceed this threshold, you may have to bunch expenses into a single year by accelerating or deferring payment as appropriate.

Charitable Giving

23. Plan for deduction limits when donating noncash charitable contributions. Donating appreciated securities such as stocks, bonds and mutual funds directly to charity allows a taxpayer to avoid taxes on these capital gains, though the deduction for capital gain property is generally limited to 30 percent of AGI.

For personal property, the charitable deduction for airplanes, boats and vehicles may not exceed the gross proceeds from their resale. Form 1098-C must be attached to tax returns claiming these types of noncash charitable contribution. Furthermore, donations of used clothing and household items, including furniture, electronics, linens, appliances and similar items, must be in “good” or better condition to be deductible. You should maintain a list of such contributions together with photos to establish the item’s condition. To the extent they are not in “good condition,” you will need to secure a written appraisal to deduct individual items valued at more than $500.

Noncash Contribution Substantiation Guide

Type of donation	Amount donated
	Less than $250	$250 to $500	$501 to $5,000	Over $5,000
Publicly traded stock	• Receipt • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records
Nonpublicly traded stock	• Receipt • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records • Qualified appraisal • Form 8283 Section B
Artwork	• Receipt • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records • Qualified appraisal • Form 8283 Section B
Vehicles, boats and airplanes	• Receipt • Written records	• 1098-C or • Acknowledgment	• 1098-C and • Written records	• 1098-C • Written records • Qualified appraisal • Form 8283 Section B
All other noncash donations	• Receipt • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records • Qualified appraisal • Form 8283 Section B
Volunteer out-of-pocket expenses	• Receipt • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records	• Acknowledgment • Written records

 

24. Make intelligent gifts to charities. With many stocks gaining ground in 2023, gifts of appreciated stock remain a great way to maximize charitable gifting while also avoiding capital gains taxes. Do not give away loser stocks (those that are worth less today than what you paid for them). Instead, sell the shares and take advantage of the resulting capital loss to shelter your capital gains or income from other sources, as explained above. Then give cash to the charity since you just sold the stock and will have the cash on hand. As for winner stocks, give them away to charity instead of donating cash. Under either situation, you recognize multiple tax benefits. When gifting appreciated stock to charity, you not only avoid paying taxes on capital gains, gifts and estates, but you may be able to deduct the value of the stock for income tax and AMT purposes as well. As always, be aware that gifts to political campaigns or organizations are not deductible.

Charitable donations are subject to the same AGI limitations in 2023 as for 2022. Keep in mind the 100 percent of AGI level for cash donations to a public charity only applied to tax years 2020 and 2021. It was not extended and reverted to 60 percent back in 2022.

Deductions Allowable for Contributions of Various Property

	Cash	Tangible personal property	Appreciated property
Public charity	60% of AGI	50% of AGI	30% of AGI
Private operating foundation	60% of AGI	30% of AGI	30% of AGI
Private nonoperating foundation	30% of AGI	30% of AGI	20% of AGI
Donor-advised fund	60% of AGI	30% of AGI	30% of AGI

 

25. Consider an investment in a special-purpose entity. As an additional workaround to the SALT limitations mentioned previously in items 20 and 22, certain states also employ special-purpose entities, which allow taxpayers to make charitable contributions to certain nonprofits (usually schools) while claiming a state tax credit for the contribution. While the taxpayer generally does not receive a federal charitable contribution deduction for the amount of the contribution for which they will receive a state credit, taxpayers often receive a much greater return in tax benefits dollar for dollar than contributions made outside of these special-purpose entity programs. In Pennsylvania, for example, the educational improvement and opportunity scholarship tax credits (EITC/OSTC) allow taxpayers to effectively divert state tax payments to donations to private schools, scholarship organizations, pre-K programs and other education initiatives.

To illustrate, using the Pennsylvania EITC/OSTC program, suppose a taxpayer contributes $50,000 to a special-purpose LLC, which in turn contributes the funds to the EITC/OSTC program. As a member of the LLC, at year end, the taxpayer would receive a K-1 from the entity reporting a Pennsylvania state tax credit for either 75 or 90 percent of the contribution, depending on whether they commit to making this contribution for one or two years, respectively. Assuming a two-year commitment, the taxpayer will receive a $45,000 credit on their Pennsylvania income tax return, reducing the tax owed by $45,000. In addition, the taxpayer would receive a federal income tax charitable contribution deduction for the remaining $5,000. Assuming a 37 percent federal tax bracket, this would result in a federal tax benefit (reduction in tax) of $1,850. Thus, on top of the $45,000 state tax benefit, the total tax benefit from a $50,000 contribution to an EITC/OSTC would be $46,850. By comparison, a contribution to a non-EITC/OSTC qualifying scholarship program would realize a tax benefit of only $18,500 (37 percent of $50,000).

	EITC/OSTC contribution	“Normal” charitable contribution
Amount of contribution (A)	$50,000	$50,000
Pennsylvania tax credit (B)	$45,000	$0
Contribution for which no state credit is given (C=A-B)	$5,000	$50,000
Federal tax rate (D)	37%	37%
Federal tax savings (E=CxD)	$1,850	$18,500
Total federal and state tax benefit (B+E)	$46,850	$18,500

 

Tax-Efficient Investment Strategies

For 2023, the long-term capital gains and qualifying dividend income tax rates, ranging from zero percent to 20 percent, have increased incrementally, as shown below.

Long-Term Capital Gains Rate	Single	Married Filing Jointly	Head of Household	Married Filing Separately
0%	Up to $44,625	Up to $89,250	Up to $59,750	Up to $44,625
15%	$44,626 - $492,300	$89,251 - $553,850	$59,751 - $523,050	$44,626 - $276,900
20%	Over $492,300	Over $553,850	Over $523,050	Over $276,900

 

In addition, a 3.8 percent tax on net investment income applies to taxpayers with modified adjusted gross income that exceeds $250,000 for joint returns ($200,000 for singles). Here are some ways to capitalize on the lower rates as well as other tax planning strategies for investors.

26. Maximize preferential capital gains tax rates. In order to qualify for the preferential lower capital gains tax rates of 20 percent, 15 percent and zero percent, a capital asset is required to be held for a minimum of one year. That is why it is paramount that, when you sell off your appreciated stocks, bonds, investment real estate and other capital assets, you are mindful of the asset’s holding period. If you have held the asset for less than one year, consider delaying the sale so that you can meet the holding period requirement (unless you have short-term losses to offset any potential gain). While it is generally unwise to let tax implications be your only determining factor in making investment decisions, you should not completely ignore them either. Also, keep in mind that realized capital gains may increase your AGI, which consequently may reduce your AMT exemption and therefore increase your AMT exposure―although this is to a much lesser extent than in prior years, given the increased AMT exemptions in recent years.

27. Reduce the recognized gain or increase the recognized loss. When selling off any securities, the general rule is that the shares acquired first are the ones deemed sold first. However, if you opt to, you can specifically identify the shares you are selling when you sell less than your entire holding of any securities. By notifying your broker of the shares you wish to have sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you more control over the amount of your gain or loss and whether it is long- or short-term. A pitfall of the specific identification method is that you cannot use any different methods (e.g., average cost method or first in, first out method) to identify shares of that particular security in the future. Rather, you will have to specifically identify shares of that particular security throughout the life of the investment, unless you obtain permission from the IRS to revert to the first in, first out method.

28. Harvest your capital losses. You should periodically review your investment portfolio to determine if there are any “losers” you should sell off. This year, even with many stocks up for the year, there are likely capital losses lurking somewhere in your portfolio. As the year comes to a close, so does your last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital loses, as potentially up $3,000 of net losses can be used to offset any ordinary income reported during the year. However, please be mindful of the wash-sale rule that could negate any capital losses realized, discussed later in item 31.

29. Take advantage of Section 1202 small business stock gain exclusion. For taxpayers other than corporations, Section 1202 of the Internal Revenue Code allows for a potential exclusion of up to 100 percent of the gain recognized on the sale of qualified small business stock (QSBS) that is held by the taxpayer for more than five years, depending on when the QSBS was acquired. The shares of the company must have been acquired after September 27, 2010, and the gain eligible for the exclusion cannot exceed the greater of $10 million or 10 times the aggregate adjusted basis of QSBS stock sold during the year. As an alternative, if the stock is held for more than six months and sold for a gain, you can elect to roll over and defer the gain to the extent that new QSBS stock is acquired during a 60-day period beginning on the date of the sale.

30. Beware of the “kiddie tax.” Generally, any investment income of a child in excess of $2,500 is taxed at the marginal tax rate of the child’s parents, under what is known as the “kiddie tax.” For kiddie tax purposes, a child is defined as someone that has not yet reached the age of 18 by the end of the year, or an 18 year old or a full-time student ages 19-23 with earned income not exceeding half of their support.

31. Keep the wash-sale rules in mind. Frequently overlooked, the wash-sale rule makes it so that no deduction is allowed for a loss if you acquire substantially identical securities within a 61‑day period beginning 30 days before the sale and ending 30 days after the sale. Instead, the disallowed loss is added to the cost basis of the new security. However, there are ways to avoid this rule. For example, you could sell a security at a loss and use the proceeds to acquire similar but not substantially identical investments. If you desire to preserve an investment position and realize a tax loss, consider the following options:

• Sell the loss securities and then wait 31 days to purchase the same securities. The risk in this strategy is that any potential appreciation in the stock that occurs during the waiting period will not benefit you.
• Sell the loss securities and then reinvest the proceeds in shares of a mutual fund that invests in securities similar to the one you sold, or reinvest the proceeds in the stock of another company in the same industry. This approach considers an asset’s industry as a whole, rather than a particular stock. After 30 days, you may wish to repurchase the original holding. This method can reduce the risk of missing out on any potential appreciation during the waiting period.
• Buy additional shares of the same security (double up), wait 31 days and then sell the original lot, thereby recognizing the loss. This strategy will allow you to maintain your position but also increases your downside risk.

Keep in mind that the wash-sale rule typically will not apply to sales of debt securities (such as bonds) since such securities usually are not considered substantially identical due to different issue dates, rates of interest paid and other terms.

As discussed later at item 38, the IRS classifies cryptocurrencies as “property” rather than as securities, which means that wash-sale rules do not apply to them and that a taxpayer can sell a cryptocurrency at a loss and buy it back immediately without having to forego deducting the loss under wash-sale rules. This loss can then be used to offset other capital gains incurred during the tax year.

32. Lower your tax burden with qualified dividends. The favorable capital gain tax rates (20, 15 or zero percent) make dividend-paying stocks extremely attractive, since these preferential lower rates will remain intact for 2023. In recent years, several proposals attempted to increase this rate from 20 percent to 25 percent, or even the highest ordinary tax rate. Though these proposals ultimately failed, they may be considered in future years. However, the best course of action is to act based on current law and consider the makeup of your investment portfolio. Keep in mind that to qualify for the lower tax rate for qualified dividends, the shareholder must own the dividend-paying stock for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date. For certain preferred stocks, this period is expanded to 90 days during a 181-day period.

33. Consider tax-exempt opportunities from municipal bonds, municipal bond mutual funds or municipal ETFs. If you are in a high tax bracket, it may make sense to invest in municipal bonds. Tax‑exempt interest is not included in adjusted gross income, so deduction items based on AGI are not adversely affected. As long as your investment portfolio is appropriately diversified, greater weight in municipal bonds may be advantageous. However, be mindful of the AMT impact on income from private activity bonds, which is still a preference item for AMT purposes. In general, a private activity bond is a municipal bond issued after August 7, 1986, whose proceeds are used for a private (i.e., nonpublic) purpose. Accordingly, review the prospectus of the municipal bond fund to determine if it invests in private activity bonds. Anyone subject to the AMT, including those with incentive stock options, should avoid these funds.

34. Time your mutual fund investments. Before you invest in any mutual funds prior to February 2024, you will want to contact the fund’s manager to confirm if any dividend payouts attributable to 2023 are expected. If such payouts do take place, you may be taxed in 2023 on part of your investment. You need to avoid such payouts, especially if they include large capital gain distributions. Additionally, certain dividends from mutual funds are not “qualified” dividend income and therefore are subject to tax at the taxpayer’s marginal income tax rate, rather than at the preferential 20 percent, 15 percent or zero percent capital gains tax rates.

35. Determine if there is worthless stock in your portfolio. Stock that becomes worthless is deductible (typically as a capital loss) in the year that it becomes worthless. The loss is calculated based on your basis in the stock, though you may need a professional appraiser’s report or other evidence to prove the stock has no value. In order to avoid going through the appraisal process, consider selling the stock to an unrelated person for at least $1, or by writing a letter to the officers of the company stating that you are abandoning the stock. Doing so will eliminate the need for an appraiser’s report and further substantiates a loss deduction.

36. Consider the greatest tax exclusion hidden in your home. Federal law (and many, but not all, states) allows an individual to exclude, every two years, up to $250,000 ($500,000 for married couples filing jointly) of gain realized from the sale of their principal residence. To calculate the gain and support an accurate tax basis, maintain records of original cost, improvements and additions. The exclusion ordinarily does not apply to a vacation home. However, with careful planning, you may be able to apply the exclusion to multiple homes.

37. Consider like-kind exchanges. A like-kind exchange provides a tax-free alternative to selling real property held for investment or for productive use in a trade or business. The traditional sale of property may cause recognition of any gain resulting in tax on the sale. Conversely, a like-kind exchange avoids the recognition of gain through the exchange of qualifying like-kind properties. The gain on the exchange of like-kind property is effectively deferred until the property received in exchange is sold or otherwise disposed. Since 2018, like-kind exchanges are only available for real property sales. If, as part of the exchange, other (not like-kind) property or money is received, gain must be recognized to the extent of the other property and money received. Losses cannot be recognized.

38. Understand the tax implication of any transactions involving digital assets. Exchanges of digital assets, such as cryptocurrencies, can occur on either a traditional or a decentralized exchange (DEX). Traditional exchanges are centralized financial institutions that collect know-your-customer information from taxpayers such as ID, proof of income and proof of address. A DEX is a peer-to-peer marketplace where transactions occur directly between individuals, There is no intermediary that holds the cryptocurrency and the taxpayer can currently remain pseudonymous. Taxpayers who use traditional exchanges can now expect to receive documentation such as an Excel file or brokerage statement reporting cryptocurrency transactions that occurred throughout the year. On DEX platforms, taxpayers must track the transactions involving cryptocurrency themselves in order to accurately report their income.

Gains and losses from the sale (including use or disposition) of cryptocurrencies, just like the sale of stock, must be reported on your tax return. Proper recording of basis in cryptocurrency can significantly decrease the capital gains, which may be assessed in the future as stricter reporting requirements are expected to be on the horizon.

39. Determine your level of participation in activities to either avoid or qualify for passive activity loss treatment. In general, losses from a passive activity are subject to more limitations (and therefore are less beneficial) than active losses. Passive activities generally occur when the taxpayer does not materially participate in the activity. The IRS regulations and statutory authority lay out a number of factors that determine whether an activity should be considered passive. Typically, when an individual spends more than 500 hours participating in an activity during the year, the activity will not be considered passive. There are also other exceptions that allow passive activities to be classified as active, including participation during five of the preceding 10 tax years or having spent more than 100 hours on the activity during the year, which equals or exceeds the involvement of any other participant. You may also want to generate passive income to utilize passive losses, which would otherwise be suspended.

As for real estate professionals, eligible taxpayers may deduct losses and credits from rental real estate activities in which they materially participate since they will not be treated as passive and may be used to reduce nonpassive income. For these purposes, an eligible taxpayer spends more than 750 hours of services during the tax year in real property trades or businesses. In addition, a taxpayer’s personal use, or rental to others, of a vacation home during the last few days of the year may have a substantial tax impact.

40. Consider the benefits of selling your passive activities to trigger use of suspended losses. Taxpayers can use passive losses to offset nonpassive income in the year in which they dispose of or abandon their entire interest in the activity in a taxable transaction, whether the transaction results in a gain or a loss.

41. Make the most of your pass-through entities’ losses by ensuring you have adequate tax basis in your S corporations or partnerships. Losses can only be claimed from a flow-through entity if you have sufficient tax basis in the entity. In order to increase your basis and potentially free up losses, you may wish to contribute cash to the entity by either increasing your equity or debt in the venture. Keep in mind that loans made by a third-party lender to an S corporation and guaranteed by an S corporation shareholder do not increase the shareholder’s basis. The loan must be made directly from the S corporation shareholder to the S corporation in order to increase his or her basis.

Planning for Retirement

42. Take advantage of SECURE Act 2.0. The SECURE Act, enacted into law in late 2019, altered the rules around how you can save and withdraw money from your retirement accounts. In late December 2022, President Joe Biden signed into law the Consolidated Appropriations Act, which included additional provisions and new laws thus titled SECURE Act 2.0. While some of the laws and provisions will take place in 2023, most of SECURE Act 2.0 will take effect down the road.

Postponing Required Minimum Distributions

Previously required minimum distributions (RMDs) started at age 72―but under current law, RMDs will now begin at 73 for those who obtain the age of 72 after December 31, 2022. The legislation will further shift the required start date for distributions to age 75 in 2033.

Requiring Automatic Enrollment in 401(k) Plans

For new 401(k) or 403(b) plans adopted after December 31, 2024, employees will be automatically enrolled in their employer’s retirement plans, though they may choose to opt out. For retirement plans already existing as of that date, automatic enrollment would remain optional, as it is today. Exemptions for this new provision include small businesses, government and church plans.

Decreasing the Penalty for Failure to Take an RMD

Under previous law, failure to comply with RMD requirements results in an excise tax equal to 50 percent of the year’s required distribution amount. Beginning in 2023, SECURE Act 2.0 reduces this penalty to 25 percent of the year’s required distribution amount. The penalty is then further reduced to 10 percent if the missed RMD is found and corrected within a two-year window of when it originally should have been taken.

Allowing Additional Catch-up Contributions for Older Workers

Catch-up contributions currently allow people age 50 and older to set aside additional dollars over the standard maximum contributions to workplace retirement plans. Beginning in 2025, another form of “catch-up contribution” would be created for those ages 60 to 63. Upon achieving this age, individuals would be allowed to add $10,000 or 150 percent of the regular catch-up amount to a 401(k) or 403(b) plan.

Restricting Repayment Period for Early Withdrawals for Birth or Adoption Expenses

The 2019 SECURE Act waived the 10 percent penalty for early withdrawals from a workplace savings plan to meet birth or adoption expenses, provided those expenses are repaid to the plan. However, it did not put a timeline on when repayment had to occur. Under SECURE Act 2.0, the law now imposes a deadline of three years from the date of withdrawal to repay the plan in full to avoid any penalties, beginning in 2024.

Expanding the Ability to Make Penalty-Free Withdrawals

SECURE Act 2.0 provide for penalty-free withdrawals from a workplace savings plan for those who experience domestic abuse. A withdrawal can be made up to the lesser of $10,000 or 50 percent of the account balance without being subject to the 10 percent penalty for early distribution. The distribution is subject to tax, but you can be eligible for a refund if repaid over three years.

43. Participate in and maximize payments to 401(k) plans, 403(b) plans, SEP (simplified employee pensions) plans, IRAs, etc. These plans enable you to convert a portion of taxable salary or self‑employed earnings into tax-deductible contributions to the plan. In addition to being deductible themselves, these items increase the value of other deductions since they reduce AGI. Deductible contributions to IRAs are generally limited to $6,500 in 2023, while substantially higher amounts can be contributed to 401(k) plans, 403(b) plans and SEPs. For 2023, the deduction for IRA contributions starts being phased out if you are covered by a retirement plan at work and your AGI exceeds $73,000 for single filers and $116,000 for married joint filers. In 2023, $22,500 may be contributed to a 401(k) plan as part of the regular limit of $66,000 that may be contributed to a defined contribution (e.g., money purchase, profit‑sharing) plan. This limit includes both employer and employee contributions. These limits are reflected in the table below. Don’t forget that additional catch-up contributions are allowed for those taxpayers age 50 and above, as noted in the table.

IRAs can be formed and contributed to as late as April 15, and contributions can be made to an existing IRA on the due date of your return, including extensions. In addition, SEPs can be established and contributed to as late as the due date of your return, including extensions, or as late as October 15, 2024, for tax year 2023.

Annual Retirement Plan Contribution Limits

Type of plan	2022	2023	2024
Traditional and Roth IRAs Catch-up contributions (ages 50-plus) for traditional and Roth IRAs	$6,000 $1,000	$6,500 $1,000	$7,000 $1,000
Roth and traditional 401(k), 403(b) and 457 plans Catch-up contributions (ages 50-plus) for 401(k), 403(b) and 457 plans	$20,500   $6,500	$22,500   $7,500	$23,000   $7,500
SIMPLE plans Catch-up contributions (ages 50-plus) for SIMPLE plans	$14,000 $3,000	$15,500 $3,500	$16,000 $3,500
SEPs and defined contribution plans*	$61,000	$66,000	$69,000

*Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2023, the limit as adjusted for inflation is $330,000.

44. Take advantage of changes to retirement contribution rules. With the passage of the original SECURE Act in 2019, there is no longer an age limit for individuals who choose to contribute toward a traditional IRA. Before 2020, those who turned 70½ during the taxable year were ineligible to make any further contributions to their retirement account. Keep in mind that in order to contribute to a traditional IRA, a taxpayer needs to have earned income from a job or self-employment, so this only affects those seniors that are continuing to work after age 70½. The contribution limit for IRAs has increased to $6,500 ($7,500 for those age 50 and over), and the deductibility of contributions may be limited based on income or your eligibility for an employer plan.

45. Avoid potential penalties for not taking a required minimum distribution. Due to the passage of the SECURE Act 2.0, if you turned 72 after December 31, 2022, you are not required to take an RMD from your account for tax year 2023. If you turned 73 during 2023, you have until April 1, 2024, to take your first RMD. If you were 73 or older during 2023, you must take your RMD for tax year 2023 by December 31, 2023. The penalty for not taking an RMD is excessive: 25 percent of the required distribution that is not taken by year-end.

46. Maximize wealth planning through Roth conversions. Converting a traditional retirement account such as a 401(k) or IRA into a Roth 401(k) or Roth IRA will create taxable income upon conversion and allow tax-free distributions in retirement. There are many good reasons (and a few bad ones) for converting a 401(k) or traditional IRA to a Roth account. Good reasons include:

• Your assets in the traditional IRA currently may have depressed in value;
• You have special and favorable tax attributes that need to be consumed such as charitable deduction carryforwards, investment tax credits and net operating losses, among others;
• You expect the converted amount to grow significantly, and tax-free growth is desired;
• Your current marginal income tax rate is likely lower than at the time of distribution (retirement);
• You have sufficient cash outside the 401(k) or traditional IRA to pay the income tax due as a result of the conversion;
• The funds converted are not required for living expenses or other needs for a long period;
• You expect your spouse to outlive you and will require the funds for living expenses; and
• You expect to owe estate tax, as the income tax paid in connection with the conversion would reduce the taxable estate.

If you decide to rollover or convert from a 401(k) or traditional IRA to a Roth account and you also expect your AGI and tax bracket to remain more or less constant, you should consider staggering the total amount you plan to shift over a period of years. For example, a taxpayer who plans to convert a total of $185,000 from a regular IRA to a Roth IRA should consider converting $37,000 per year for five years. This strategy may prevent the conversion from pushing a taxpayer into a higher tax bracket, since the conversion is fully taxable on the amount converted.

The IRS recently released inflation adjusted income tax brackets for tax year 2024, which could keep taxpayers in the same tax bracket while potentially earning more income. You may want to consider holding off until 2024 to make a larger rollover given the taxable income bracket increase for inflation.

Keep in mind that a conversion cannot be recharacterized afterward, so careful planning is needed.

47. Make charitable contributions directly from 2023 IRA distributions. Current law provides an exclusion from gross income for certain distributions of up to $100,000 from a traditional IRA when contributed directly to a qualified tax-exempt organization to which deductible contributions can be made. For married couples, each spouse can make a $100,000 distribution from their respective retirement account for a potential total of $200,000 for year 2023. Under the SECURE 2.0 Act, the annual contribution limit in future years is indexed for inflation. This special treatment applies only to distributions made on or after the date the IRA owner reaches age 70½, and the distribution must be made directly from the IRA trustee to the charitable organization. Distributions that are excluded from income under this provision are not allowed as a deduction. Qualified charitable distributions (QCDs), as these are called, may be especially beneficial for those charitably minded taxpayers who claim the standard deduction or whose taxable Social Security benefits are affected by AGI thresholds.

The SECURE 2.0 Act also allows IRA owners age 70½ to make a one-time election to transfer a QCD of $50,000 for 2023 (the contribution limit is indexed for inflation in future years) to a split-interest entity, such as a charitable remainder unitrust, charitable remainder annuity trust or charitable gift annuity. The split-interest entity is required to pay a fixed percentage of 5 percent or greater. Payments received from the split-interest entity or taxable as ordinary income.

48. Plan to stretch. The SECURE 2.0 Act maintained the SECURE Act’s partial elimination of the “stretch IRA” strategy, whereby IRA owners would utilize their retirement accounts as a means to transfer wealth to the next generation. For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. This strategy is particularly beneficial for taxpayers with Roth IRAs, as beneficiaries do not have to pay taxes on withdrawals from the Roth.

For deaths of plan participants or IRA owners beginning in 2020, distributions to most nonspousal beneficiaries are generally required to be distributed within 10 years following the plan participant or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Planning for Higher Education Costs

Many tax-saving opportunities exist for education-related expenses. If you or members of your family are incurring these types of expenses now or will be in the near future, it is worth examining them. Here are some strategies to consider as year-end approaches.

49. Retain control and plan ahead for tax-free growth with 529 qualified tuition plans. Section 529 plans are well known for their tax benefit: distributions of contributions and earnings are tax free when utilized for qualified higher education expenses. However, another feature of Section 529 plans that taxpayers usually overlook is the ownership and control of the plan lies with the donor (typically the parent or grandparent of the beneficiary student) and not with the beneficiary. Having donor control and ownership means the plan is not considered an asset of the student for financial aid purposes, generally resulting in higher financial aid.

While many states allow deduction on the year of contributions, 529 plan contributions, which are made on an after-tax basis, do not provide federal tax savings. However, the more significant federal tax benefit is that contributions and earnings on contributions that are subsequently distributed for qualified higher education expenses (including tuition, room and board, and other costs) at accredited schools anywhere in the United States are free of federal income tax and may be free of state income tax. Since 2018, 529 plan owners can use tax-free distributions for up to $10,000 of eligible expenses at elementary and secondary schools, in addition to colleges and universities. Since the SECURE Act was passed in December 2019, tax-free distributions can now also be used to pay for eligible expenses related to an apprenticeship program, in addition to higher education expenses. In addition, the SECURE Act allows up to $10,000 of distributions to pay principal or interest on a qualified education loan of the beneficiary or a sibling of the beneficiary.

To the extent that distributions are not for qualified higher education expenses, regular income tax plus a 10 percent penalty may apply to the earnings portion of the distribution. As contrasted with the other education strategies discussed below, contributions may be made regardless of the donor’s AGI.

An election can also be made to treat a contribution to a 529 plan as having been made over a five-year period. Consequently, for 2023, a married couple can make a $170,000 contribution ($180,000 beginning in 2023) to a 529 plan without incurring any gift tax liability or utilizing any of their unified credit since the annual gift exclusion for 2023 is $17,000 per donor (increasing to $18,000 for 2024) and the contribution can be split with the donor’s spouse. It is important to note that additional gifts made in the five-year period to the same recipients have a high chance of triggering a gift tax filing obligation.

50. Take advantage of education credit options. If you pay college or vocational school tuition and fees for yourself, your spouse and/or your children, you may qualify for either the American opportunity tax credit or the lifetime learning credit to offset the cost of education. These credits reduce taxes dollar-for-dollar, but begin to phase out when 2023 modified AGI exceeds certain levels. The chart below provides a summary of the phaseouts.

2023 Education Expense and Credit Summary

Tax benefit	Single filers (not including married filing separately)	Joint filers	Maximum credit/deduction/contribution
American opportunity tax credit	$80,000 - $90,000	$160,000 - $180,000	$2,500 (credit), up to 40% of the credit is refundable ($1,000)
Lifetime learning credit	$80,000 - $90,000	$160,000 - $180,000	$2,000 (credit)
Student loan interest deduction	$75,000 - $90,000	$155,000 - $185,000	$2,500 (deduction)
Coverdell education savings account	$95,000 - $110,000	$190,000 - $220,000	$2,000 (contribution)

 

51. Match student loan payments with retirement contributions. The CARES Act gave temporary payment relief to borrowers of certain qualifying federal student loans. This pause has now ended and payments for student loans have resumed.

If you paid interest on a qualifying federal student loan, an “above the line” deduction of up to $2,500 is allowed for interest due and paid in 2023. Note that the deduction is not allowed for taxpayers electing the filing status of married filing separate. Additionally, a taxpayer who can be claimed as a dependent on another's return cannot take the deduction. The deduction is phased out when AGI exceeds certain levels. See chart above.

Starting in 2024, a provision of the SECURE 2.0 Act allows employers to make matching contributions to a defined contribution plan based on the amount of an employee’s student debt repayments. Employers rely on employees to certify the amount of qualified student loan payments made. The matching contribution is then calculated as if the employee elected to contribute the loan payment amount to the plan by payroll deduction, even though the employee does not make any elective contributions to the plan.

52. Fund contributions to a Coverdell education savings account. A Coverdell education savings account (ESA) is a tax-exempt trust or custodial account organized exclusively in the United States solely for paying qualified education expenses for the designated beneficiary of the account. At the time the trust or account is established, the designated beneficiary must be under 18 (or a special needs beneficiary). Contributions to a Coverdell ESA must be made in cash and are not tax deductible; however, the earnings grow on a tax-deferred basis. The maximum total annual contribution is limited to $2,000 per beneficiary per year, and the contribution is phased out when the modified AGI is between $190,000 and $220,000 for joint filers and $95,000 and $110,000 for single filers.

Distributions from Coverdell ESAs are excludable from gross income to the extent that the distributions do not exceed the qualified education expenses incurred by the designated beneficiary, less any amounts covered by grants or scholarships and credits received from lifetime learning or American opportunity tax credits, as discussed at item 50 above. Tax-free withdrawals can be made for qualified expenses, which also include kindergarten through grade 12 and higher education expenses. If distributions exceed qualified expenses, a portion of the distributions is taxable income to the designated beneficiary. Furthermore, to the extent that distributions are not used for educational expenses, a 10 percent penalty applies.

53. Consider education benefits from financial aid and various loan repayment plans. While the Biden-Harris administration’s original plan to forgive some federal student loans (up to $20,000) was shut down by the Supreme Court in June 2023, they have set their focus on other areas of student debt relief. In October 2023, they announced the approval of an additional $9 billion in debt relief fixes. These fixes are mainly for income-driven repayment plans (IDR) and the public service loan forgiveness (PSLF) plan, but also includes automatic relief for borrowers that have permanent and total disabilities. For many years, millions of individuals in these plans were unable to access the student debt relief they were eligible for. As of October 2023, the administration had approved roughly $127 billion in student debt forgiveness, including IDR plans, PSLF plans, borrowers with certain disabilities and some borrowers who were misled by their schools. To learn more about these plans and see whether you qualify, visit the Federal Student Aid office’s website.

Strategies for Saving

54. Use an achieving a better life (ABLE) account to cover qualified disability expenses. An ABLE account is a tax-advantaged savings vehicle that can be established for a designated beneficiary who is disabled or blind. Only one account is allowed per beneficiary, though any person may contribute. Contributions to an ABLE account are not deductible on the federal tax return, but some states allow a deduction for contributions to the plan. Earnings in the account grow on a tax-deferred basis and may be distributed tax-free if used for qualified disability expenses, including basic living expenses such as housing, transportation and education, as well as medical necessities. If distributions are used for nonqualified expenses, those are subject to income tax plus a 10 percent penalty tax.

Total annual contributions by all persons to the ABLE account cannot exceed the gift tax exclusion amount ($17,000 for 2023, $18,000 for 2024), though additional annual contributions may be possible if the beneficiary is employed or self-employed. An allowed rollover from the 529 college savings account to the ABLE account is considered a contribution and counts toward the maximum allowed annual limit. States have also set limits for allowable ABLE account savings. If you are considering an ABLE account, contact us for further information.

55. Achieve tax savings via health and dependent care flexible spending accounts (IRC Section 125 accounts). These so-called “cafeteria” plans enable employees to set aside funds on a pretax basis for (1) unreimbursed qualified medical expenses of up to $3,050 per year ($3,200 in 2024); (2) dependent care costs of up to $5,000 per year, per household; and (3) adoption assistance of up to $15,950 per year. Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes (at maximum rates as high as 13.3 percent), resulting in a tax savings of as much as 57.95 percent. Paying for these expenses with after‑tax dollars, even if they meet various AGI requirements, is more costly under the current tax rate structure. Since many restrictions apply, such as the “use it or lose it” rule, review this arrangement before making the election to participate.

56. Reach your retirement goals with a health savings account (IRC Section 223 account). Health savings accounts (HSAs) are another pretax medical savings vehicle that are currently highly favored in the marketplace. Taxpayers are allowed to claim a tax deduction for contributions to an HSA even if they cannot itemize medical deductions on Schedule A. HSAs can also work alongside your 401(k) or IRAs to accomplish your retirement goals. Some key HSA elements include: (1) HSA contributions are deductible, subject to annual limits; (2) employer contributions to your HSA are not treated or taxed as income to you; (3) interest or other earnings on your HSA account accrue tax-free, provided there are no excess contributions; and (4) HSA distributions are tax-free if spent on qualified medical expenses. If distributions are not used on qualified medical expenses, they will be subject to a 20 percent penalty if the taxpayer is under the age of 65.

To be eligible for an HSA, you must be covered by a high deductible health plan (HDHP). You must also meet the following requirements: (1) you must have no other health coverage besides the HDHP; (2) you must not be enrolled in Medicare; and (3) you cannot be claimed as a dependent on someone else’s income tax return in the current tax year. For self-only coverage, the 2023 limit on deductible contributions is $3,850. For family coverage, the 2023 limit on deductible contributions is $7,750. A "catch-up" contribution will increase each of these limits by $1,000 if the HSA owner is 55 or older at the end of the year.

57. Consider tax payments by credit or debit card. The IRS accepts tax payments by credit and debit cards, both online and over the phone. Some taxpayers may choose to make tax payments with a credit card, which could potentially earn rewards like frequent flyer miles, cash‑back bonuses, reward points or other perks. The IRS now allows a taxpayer to select their preferred payment processor from either payUSAtax, Pay1040 or ACI Payments Inc., whose credit card fees ranged from 1.85 percent to 1.98 percent for tax year 2023. Additionally, they offer flat rates for most debit cards, which range from $2.20 to $2.50. The IRS is also accepting digital wallet payments like PayPal and Venmo. If you are hoping to take advantage of your credit card’s rewards, you must consider the potential fees that come along with your balance due. For example, a $20,000 balance due payment will incur a fee of approximately $400, which is considered a nondeductible personal expense. It might be worth it for some to use their debit card instead, receiving a lower fee of roughly $2.50, but missing out on potential rewards from their credit card.

58. Consider accelerating life insurance benefits. Selling all or even just a portion of your life insurance policy allows the policyholder to receive funds in advance while they are still living. This practice is more prevalent with individuals who are chronically or terminally ill, using the funds to help cover medical bills, the cost of treatment or long-term care services. Additionally, those who are chronically or terminally ill and choose to accelerate their life insurance benefits may exclude these payments from income, subject to certain requirements. When you sell part of your life insurance policy, you are still responsible for making premium payments. An alternative to this is to sell your entire life insurance policy to a viatical settlement provider who regularly engages in the business of purchasing or taking assignments of such policies. Payments received from the viatical settlement provider may also be excluded from income.

59. Manage your nanny tax. If you employ household workers, it might be best to try to keep your total payments to each of your household workers under $2,600. If you pay $2,600 or more to a worker, you are required to withhold Social Security and Medicare taxes from them and pay those withholdings, along with matching employer payroll taxes, on your individual income tax return on Schedule H, Household Employment Taxes. You are not required to withhold Social Security and Medicare taxes from household employees who are your spouse, your child (if they are under age 21), your parent (exceptions apply) and an employee under age 18 (unless the household work is their principal occupation). Additionally, you may have to pay Federal Unemployment Tax, commonly known as FUTA, if you paid more than $1,000 in total to your household workers in any calendar quarter. You also may be required to file quarterly wage reports with your state department of labor to comply with state unemployment insurance requirements, in addition to annual reporting statements such as Form W-2 and Form W-3.

60. Consider deferring loan modifications and debt cancellations until 2024. Deferring the cancellation of your debt until 2024 could lower your taxable income for 2023. Although most debt forgiveness and cancellations are considered taxable income, there are certain exceptions. If your debt cancellation involves insolvency, bankruptcy, student loans or certain other situations, it may qualify for an exclusion from your cancellation of debt (COD) income. However, even when debt cancellation is excluded from income, it may still affect other tax attributes. For instance, the basis usually needs to be reduced for an asset that has its secured debt cancelled, meaning the COD income exclusion is more of a delay in income recognition rather than a complete exclusion. This is because the cancellation will have ongoing effects that need to be monitored for years after the debt has been cancelled. Moreover, determining whether a taxpayer is insolvent can be challenging and costly, as it requires asset and liability appraisals to establish their fair market value on a specific date.

61. Beware of alternative minimum tax. For individuals, AMT remains less threatening than it has been in the past. The AMT predominantly applies to high-income individuals, disallowing certain deductions, while also including certain exempt income in taxable income. In 2023, the exemption amount for single individuals is $81,300 and $126,500 for joint filers. For tax year 2023, the AMT tax rate of 28 percent applies to excess alternative minimum taxable income of $220,700 for all taxpayers ($110,350 for married couples filing separately).

62. Take advantage of extended energy credits. A number of tax credits for purchasing or installing energy efficient improvements for qualified residential properties were extended and modified as part of the Inflation Reduction Act of 2022. The applicable credits that have been adjusted are shown below:

Credit	Expires	Covers	Maximum credit
Energy efficient home improvement credit	Dec. 31, 2032	Exterior windows and doors Insulation and systems that reduce heat gain or loss Heat pumps, central air conditioners and water heaters Biomass stoves and boilers Natural gas, propane or oil furnaces or hot water boilers Qualified advanced main air-circulating fans Home energy audits	$1,200 (for 2023 - 2032) for energy property costs and certain energy efficient home improvements $2,000 per year for qualified heat pumps, biomass stoves and boilers
Residential clean energy credit	Dec. 31, 2034	Solar, wind and geothermal power generation Solar water heaters Fuel cells Biomass furnaces and water heaters (no longer applicable after Dec. 31, 2022) Battery storage technology	30% for 2022 - 2032, 26% for 2033, 22% for 2034
Qualified fuel cell motor vehicle	Dec. 31, 2032	Purchases of new qualified fuel cell motor vehicles	$4,000 to $40,000
Alternative fuel vehicle refueling equipment credit	Dec. 31, 2032	Equipment to recharge electric vehicle	$30,000 (for business) 30% of the costs, up to $1,000 (for nondepreciable property)
New energy efficient home credit	Dec. 31, 2032	New (and manufactured) homes meeting Energy Star standards Certified zero-energy ready homes	$2,500 for new (and manufactured) $5,000 for zero-energy

 

63. Retroactively remit withholding via a retirement rollover. Once a year, the IRS allows taxpayers to withdraw money from an IRA tax-free, as long as it is rolled over to another IRA within 60 days. Some perceptive individuals even use this provision to take out a short-term, tax-free loan. The one-year waiting period begins on the date you receive the IRA distribution, not on the date you roll the distribution back into the same or another IRA. These IRA withdrawals are able to have (and in some cases require) federal and/or state taxes withheld. Since withholding can be treated as evenly distributed throughout the year, it is possible to make up for missed estimated payments from earlier in the year.

For example, if you determine in the fourth quarter of 2023 that you missed the previous three quarterly federal estimated payments totaling $60,000, you could take out an IRA distribution for $100,000 with 80 percent or $80,000 withheld. The $80,000 would be remitted to the IRS and, within 60 days of the $100,000 distribution, you would pay back the entire $100,000 amount. The $80,000 of federal withholding would be applied evenly throughout 2023, resulting in $20,000 payments for each of the previous three quarters and therefore void the calculated $60,000 underpayment.

64. Withdraw retirement funds penalty-free for new parents who need it. Generally, a distribution from a retirement plan must be included in taxable income. Unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59½ is also subject to a 10 percent early withdrawal penalty on the amount includible in income. The SECURE Act created an exception to the 10 percent penalty for new parents. Now plan distributions (up to $5,000) used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

65. Plan for the net investment income tax and Medicare surtax. High-income taxpayers face two special taxes—a 3.8 percent NIIT and a 0.9 percent additional Medicare tax on wage and self-employment income.

Net Investment Income Tax

The 3.8 percent NIIT tax applies, in addition to income tax, to your net investment income. The tax only affects taxpayers whose modified adjusted gross income exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. These threshold amounts are not indexed for inflation. Thus, over time, inflation will cause more taxpayers to become subject to the 3.8 percent tax. Net investment income that is subject to the 3.8 percent tax consists of:

• Interest;
• Dividends;
• Annuities;
• Royalties;
• Rents; and
• Net gains from property sales.

Income from an active trade or business is not included in net investment income and neither is wage income. However, passive business income is subject to the NIIT. So, while rents from an active trade or business are not subject to the tax, rents from a passive activity are. See item 39 for more information regarding the classification of passive activities. Income from a business of trading financial instruments or commodities is also included in net investment income.

Medicare Surtax

Some high-wage earners pay an extra 0.9 percent Medicare tax on a portion of their Medicare wages in addition to the 1.45 percent Medicare tax that all wage earners pay. The 0.9 percent Medicare tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others.

The additional 0.9 percent Medicare tax also applies to individuals with self-employment income. This 0.9 percent tax is in addition to the regular 2.9 percent Medicare tax on all self-employment income. The $250,000, $125,000 and $200,000 thresholds are reduced by the taxpayer's wage income. While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the extra 0.9 percent tax is not deductible. A self-employment loss is not considered for purposes of the 0.9 percent Medicare tax.

66. Consider selling the stock you received from incentive stock options (ISOs), aka statutory options. If you receive ISOs, you are entitled to special treatment for regular tax purposes. This includes: no taxation at the time the ISO is granted or exercised; deferral of tax on the benefit associated with the ISO until the stock is sold; and taxation of the entire profit on the sale of stock acquired through ISO exercise. The ISO is taxed at the lower long-term capital gain rates as long as you hold it for more than two years from date of grant and one year from date of exercise. Employment taxes do not apply on the exercise of an ISO. Be aware that the exercise of an ISO may produce AMT tax, as discussed below.

Statutory Stock Option (ISO)

	Regular tax	AMT
Grant date	Not taxable.	Not taxable.
At exercise date	Not taxable.	Increases AMT income by FMV of option less exercise price.
Date of sale (holding period met)	• Income subject to capital gains rates. • Basis equals exercise price.	Decreases AMT income by the positive AMT adjustment required at exercise date.
Date of sale (holding period not met)	• Gain on sale: FMV of the options less the exercise price is treated as taxable W-2 wages; excess gain is capital gain. • Loss on sale: The loss is a capital loss.	• Negative AMT adjustment equal to the positive AMT adjustment required at exercise date. • No adjustment required if stock is exercised and sold in the same year.

 

Statutory Stock Option (ESPP)

	Regular tax	AMT
Grant date	Not taxable.	Not taxable.
At exercise date	Not taxable.	Not taxable.
Date of sale (holding period met)	Compensation income if FMV of stock is greater than exercise price.	Same as regular tax.
Date of sale (holding period not met)	• The FMV (at exercise date) of the option minus the exercise price is treated as taxable W-2 wages. • Basis in the stock is increased by the amount included in compensation. Difference between increased basis and the selling price is a capital gain or loss.	Same as regular tax.

 

Nonstatutory Stock Option

	Regular tax	AMT
Grant date	Not taxable unless FMV is readily determined.	Same
At exercise date	• Substantially vested stock: FMV of option minus the exercise price is treated as taxable W-2 wages. • Restricted stock: Defer recognition until substantially vested.	Same
Date of sale (holding period met or not met)	• The holding period requirement is not applicable to nonstatutory stock options. • Income is subject to short-term or long-term capital gain or loss treatment. • Basis equals the amount treated as taxable wages plus exercise price. • Typically exercise and sale occur on the same day.	Same

 

67. Take advantage of deferred compensation contributions to maximize the benefits of deferring income. Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2023, the limit as adjusted for inflation is $330,000. This means that for an executive earning $350,000 a year, deductible contributions to, for instance, a 15 percent profit-sharing plan are limited to 15 percent of $330,000, or $49,500. Nevertheless, there is a way to avoid this limitation that you might want to consider.

It is possible to increase the benefits by using plans that are not subject to qualified plan limitations through nonqualified deferred compensation (NQDC) agreements. These plans have no mandatory contribution limits and it is at the employer’s discretion who participates. These deferred compensation agreements are contracts between an employer and an employee for the payment of compensation in the future—at retirement, on the occurrence of a specific event (such as a corporate takeover) or after a specified number of years―in consideration of the employee’s continued employment with the employer.

Unlike a qualified plan, an NQDC is funded at the discretion of the employer and is subject to the claims of creditors. There are no guarantees that the benefits will be available to the employee in the future. Essentially, the trust is under the employer’s control and, structured properly, will result in a deferral of income taxes for the employee on the amount of compensation deferred above the traditional limitations. Distributions will be taxed at ordinary income rates and are subject to FICA withholding when either performance has occurred or there is no longer a substantial risk for forfeiture and the compensation has vested.

68. Consider filing an IRC Section 83(b) election with regard to year-end restricted stock grants to preserve potential capital gain treatment, but be careful. If you make the election within 30 days of the grant, you will pay tax at ordinary income rates on the spread between the market price (the value of the stock) and the grant price (the amount you paid). The benefit, however, is that you defer taxation on the future appreciation in the value of the restricted stock until it is sold and the post-election increase in value is taxed at the lower capital gain rates, rather than the higher ordinary income rates. The risk with making the election, however, is that the stock price might decline by the vesting date and you will have then prepaid income tax on an unrealized gain. If you eventually sell the stock at a loss, you will be subject to the net capital loss limitation of $3,000. The rules governing restricted stock awards are technically complex and call for careful tax planning strategies.

69. Consider filing an IRC Section 83(i) election with regard to qualified equity grants. Qualified employees at private companies who are granted nonqualified stock options or restricted stock units may elect to defer the income from qualified stock transferred to the employee by the employer for up to five years. This election is an alternative to being taxed in the year in which the property vests under IRC Section 83(a) or in the year in which it is received under Section 83(b). The election to defer income inclusion for qualified stock must be made no later than 30 days after the first date that the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.

Caution: If the fair market value of the stock decreases within the deferral period, the fair market value on the date the stock is received still must be included in the employee's income. This creates the risk of the employee paying income tax on an amount that is never received.

If a qualified employee elects to defer income inclusion, the employee must include the income at the earliest of the following dates:

• The first date the qualified stock becomes transferable, including transferable back to the employer;
• The date the employee first becomes an excluded employee;
• The first date on which any stock of the employer becomes readily tradable on an established securities market;
• The date five years after the earlier of the first date the employee’s right to the stock is transferable or is not subject to a substantial risk of forfeiture; or
• The date on which the employee revokes his or her inclusion deferral election.

70. Consider taking a lump-sum distribution of employer stock from a retirement plan. Receiving a lump-sum of employer stock could allow you to achieve large tax savings. Employer stock in a lump-sum distribution from a qualified plan is taxed based on the plan’s basis in the stock rather than on its value, unless a taxpayer elects otherwise. Consequently, assuming value exceeds cost, the tax on the unrealized appreciation is deferred until a later date when the stock is sold. This could be many years after receipt. As an added benefit, when the stock is sold at a later date, the gain is subject to tax at the more favorable long-term capital gains rate. Once distributed, the stock must be held for at least a year in order for any additional appreciation after the date of the lump-sum distribution to be given long-term capital gains treatment. Cash or other nonemployer stock distributed as part of the lump-sum distribution will be taxed at ordinary income tax rates.

71. Implement strategies associated with international tax planning. For executives and high-income earning consultants working abroad, it’s worth exploring strategies to minimize your personal tax liabilities. This can include maximizing the provisions for foreign earned income and housing exclusions, as well as deductions and credits for foreign taxes paid. The taxation process in foreign countries often depends on tax treaties and requires a personalized approach to avoid double taxation. Conducting tax equalization calculations can be helpful in breaking down compensation to maximize the tax benefits associated with international assignments. See the discussion later at items 131-135.

72. Review your tax planning with a fresh perspective. Corporate executives should consider whether additional tax assistance or supplemental wealth planning may add value. Having a third party take care of your tax planning could reduce potential conflicts of interest associated with having the employer company’s accountants handle the tax related services for the company’s employees. TAG has developed a tax program tailored specifically for corporate executives. Our Executive Tax Assistance Program, designed for corporate executives, provides comprehensive, confidential and highly personalized individual and business tax preparation, planning and consulting services at group-discounted rates. TAG uses a strategic approach to provide comprehensive solutions to your needs.

73. Decrease your tax liability on pass-through income. Business income from pass-through entities is currently taxed at the ordinary individual tax rates of the owners or shareholders. Taxpayers who receive qualified business income from a trade or business through a partnership, limited liability company, S corporation and/or sole proprietorship are allowed a 20 percent deduction, subject to taxable income phaseouts and complex calculations, in arriving at taxable income. The deduction is also afforded to taxpayers who receive qualified real estate investment trust dividends, qualified cooperative dividends and qualified publicly traded partnership income. For owners with taxable incomes over $364,200 (joint filers) or $182,100 (all other filers), the deduction is subject to reduction or elimination based on the owner’s pro rata share of W-2 wages paid by the business and/or the business’ basis in qualified property.

In addition, for taxpayers who own a specified service business and whose taxable income exceeds $464,200 for married individuals filing jointly and $232,100 for all other filers, the deduction is phased out and no longer available.

A “qualified trade or business” is defined as any trade or business other than a specified service trade or business and other than the trade or business of being an employee. “Specified services” are defined as a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services (investing and investment management, trading, dealing in securities, partnership interests or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees). Notably absent from this list, and specifically excluded from the definition of specified services, are engineering and architectural services, as well as real estate agents and bankers.

74. Take advantage of historically low corporate income tax rates. Since 2018, corporations have been subject to a flat 21 percent tax rate. The 21 percent rate also applies to personal service corporations such as accounting firms and law firms. Over the past two years, legislation in Congress has consistently considered raising corporate tax rates. However, the Inflation Reduction Act of 2022 only created two new corporate tax provisions, expected to affect only a very small percentage of corporations: those with over $1 billion of income or publicly traded companies. See our discussion of these items above at items 9 and 10.

Under current law, the 21 percent corporate rate is not scheduled to expire until tax years beginning after December 31, 2025.

75. Utilize net operating losses (NOL) thoughtfully. Beginning in 2021, the option to carry an NOL back to a prior tax year was eliminated (except for farming losses and certain insurance companies). NOLs can still be carried forward indefinitely and are also subject to an additional annual limitation of the lesser of 80 percent of current year taxable income or the NOL carryforward. For example, a taxpayer with 2023 taxable income of $3 million and an NOL carryforward of $4 million from a prior year would be able to apply $2.4 million of the NOL carryforward (80 percent of 2023 taxable income) to offset its 2023 taxable income and carry forward the remaining NOL balance of $1.6 million indefinitely.

76. Plan for extended excess business loss limitations. The TCJA effectively limited the amount of business losses that taxpayers were able to use to offset other sources of income for tax years 2018-2025. While the CARES Act reversed the excess business loss (EBL) provisions under TCJA for 2018-2020, the EBL limitations came back into force in 2021―meaning that taxpayers again have to monitor and potentially limit business losses under TCJA. Last year, the Inflation Reduction Act extended the EBL provisions an additional two years, through 2028.

An EBL is defined as the excess of a taxpayer’s aggregate trade or business deductions over the taxpayer’s aggregate gross trade or business income or gain, plus a statutory threshold, indexed for inflation, of $578,000 for joint filers ($289,000 for other filers) for 2023. Net trade or business losses in excess of $578,000 for joint filers ($289,000 for other filers) are carried forward as part of the taxpayer’s net operating loss to subsequent tax years. For 2024, the threshold will increase to $610,000 for joint filers ($305,000 for other filers).

The CARES Act also clarified several gray areas associated with EBL limitations created by TCJA, including:

• The exclusion of taxpayer wages from trade or business income;
• The exclusion of net operating loss carryforwards from determining a taxpayer’s EBL; and
• Specifying that only trade or business capital gains are included in EBL computations, while excluding net capital losses. The taxpayer is to include in EBL limitations the lesser of either capital gain net income from business sources or capital gain net income.

77. Be sure to receive the maximum benefit for business interest. For 2023, the business interest expense deduction is limited to 30 percent of the adjusted taxable income of the business, applicable at the entity level for partnerships and S corporations. However, certain smaller businesses (with less than an inflation-indexed $29 million in average annual gross receipts for the three-year tax period ending with the prior tax period) are exempt from this limitation for 2023. For 2024, this inflation indexed amount is expected to be $30 million.

The deduction limit for net business interest expenses for 2023 is limited to 30 percent of an affected business’ adjusted taxable income. Additionally, the formula to determine adjusted taxable income has yet again changed. For 2022 and forward, depreciation and amortization are no longer allowed to be added back to taxable income when determining the business interest limitation. Interest and taxes are still allowed to be added back.

78. Evaluate your sales tax exposure. In light of the Supreme Court’s South Dakota v. Wayfair, Inc. decision, businesses should periodically review their operations to determine if they have additional sales and use tax exposure. Businesses that have large retail or e-commerce sales may be subject to sales or use taxes, even if they do not have a physical presence in the state or local jurisdiction.

Recently, however, a Pennsylvania court ruled in favor of a taxpayer, stating that an out-of-state business selling products through Amazon’s Pennsylvania warehouse was not subject to sales and income tax in the state.

In a more aggressive interpretation, the Multistate Tax Commission (MTC), which is a conglomeration of state tax agencies seeking to define a uniform set of rules for determining sales and income tax nexus, issued guidance indicating that the following activities are sufficient to create nexus for an out-of-state business:

• Providing post-sale customer support via website chat or email link;
• The acceptance of job applications for nonsales positions on a website;
• Placing cookies on the computers of customers who browse a website for the purpose of adjusting production or identifying/developing new products to sell.

So far, California and New York have announced the adoption of the MTC’s provisions, with many more states expected to follow suit.

Accordingly, now is the time to perform an assessment of your business activities and make plans to become compliant (if warranted) in early 2024.

79. Evaluate your state tax exposure in light of increased telecommuting. In a post-COVID, remote work environment, virtually every state has taken the position that having an employee present within a state creates nexus and will potentially subject the employer to business registrations, employee withholding, registered agent requirements and/or business tax filings.

As such, each state where you have an employee working remotely must be closely examined, as every state has different methods for apportioning taxable income, sourcing revenue, minimum factor presence standards and other registration requirements. We have conducted many such assessments and would be pleased to assist our clients with future needs.

80. Be careful where you operate―avoid an unintentional income tax nexus. The concept of corporations paying their fair share of taxes ebbs and flows in worldwide media, but it has received renewed attention in the cash-strapped economies of the post-COVID-19 pandemic era.

Many states and even local tax jurisdictions have looked to broaden their tax collection base through the assertion of nexus in a variety of different ways. For tax purposes, nexus is a minimum connection between a taxpayer and a tax jurisdiction that must take place before a taxing jurisdiction can impose a tax obligation on a taxpayer.

Although it has been widely established through case law that physical presence in a taxing jurisdiction is not required in order to create income tax nexus, the concept of economic nexus is becoming more and more prevalent. Economic nexus looks to the quantity of transactions and/or the dollar amount of transactions a taxpayer realizes in a given tax year within a taxing jurisdiction. Through recent court cases, states have become more empowered to expand upon the concept of economic nexus and apply more broadly across essentially any type of activity in which the taxpayer is engaged.

Additionally, there has been a consistent shift of states updating legislation in order to source revenue through the “market-based” approach. Market-based sourcing requires the taxpayer to allocate revenue based on where the ultimate receipt of their services is derived. If a taxpayer has its operations and employees solely in State X, but sells services to customers in States A, B and C, the taxpayer would be required to allocate a portion of their revenue to States A, B and C, and file income tax returns accordingly. Certain states have minimum revenue thresholds (economic nexus thresholds) that have to be met in order to create a reporting requirement, while other states require reporting if there is even $1 of revenue sourced under a market-based approach. As of the current tax year, roughly 80 percent of states require a market-based approach when sourcing revenue.

Now is the opportune time for taxpayers to assess the nature of their activities, locations (including remote work) of employees and locations of customers, as virtually any type of business, no matter how trivial, may trigger nexus. Mostly all states offer some form of voluntary disclosure program where a taxpayer can voluntarily come forward, file several years of back tax returns and pay any tax due, and in return the state will waive penalties, and in some instances even a portion of the interest on back taxes, depending on the details of each state’s respective program.

81. Elect into state pass-through taxes to save owners federal tax. Currently, 36 states have enacted pass-through entity (PTE) tax filing elections. Nine states have no personal income tax, which means only a select few have not enacted a PTE tax (Maine, Pennsylvania, Vermont, District of Colombia, Delaware and North Dakota).

As a quick refresher, the TCJA put a cap of $10,000 on the state and local income tax deduction for taxpayers itemizing their deductions on Schedule A. In response, several high-tax states enacted legislation allowing pass-through entities (partnerships, LLCs and S corporations) to elect to pay the state income tax at the entity level and pass out a state income tax credit to the partners/shareholders. The PTE tax election allowed the state income tax liability to be deducted at the entity level, for federal purposes, effectively bypassing the $10,000 limitation imposed by the TCJA.

In the beginning stages, PTE tax elections were more stringent; however, many states have relaxed the requirements governing which entities are allowed to participate, as well as how income is apportioned for purposes of determining the PTE tax liability.

A pass-through entity operating in several different states with owners residing in several different states must carefully examine the PTE regulations in each state where tax filings are required. Each state has different rules for the timing of making the election, when estimated tax payments are required, whether or not certain partners/shareholders can opt out of the PTE election, income apportionment and PTE tax rates.

PTE elections can be particularly beneficial in years a pass-through entity experiences unusually high taxable income or anticipate entering into an agreement to sell all or a portion of the business. PTE elections will continue to offer substantial tax savings for those who can participate through at least 2025. Once the $10,000 limitation imposed by the TCJA expires, PTE advantages may become obsolete or evolve even further, depending on how Congress acts.

82. Review your plans to entertain clients. The Consolidated Appropriations Act of 2021 provided a temporary 100 percent deduction for business meals provided by a restaurant for the 2021 and 2022 tax years. This expanded deduction lapsed on January 1, 2023, at which time the limitation reverted back to 50 percent for most meals.

Since 2018, businesses have been unable to write off expenses associated with entertaining clients for business purposes. However, business meals paid concurrently with entertainment expenses are still 50 percent deductible, provided these expenses are separately paid for or separately stated on the invoice.

83. If you are looking to utilize bonus depreciation, plan your purchase of business property by year-end. For 2023, businesses can expense, under IRC Section 179, up to $1.16 million of qualified business property purchased during the year. This $1.16 million deduction is phased out, dollar for dollar, by the amount that the qualified property purchased exceeds $2.89 million.

Generally, qualified business property for purposes of Section 179 includes tangible personal property used in a trade or business, as well as nonresidential qualified improvement property, including, but not limited to, roofs, HVAC systems, fire protection and alarm systems and security systems. The qualified improvement property must also be placed in service after the date of the real property in order to qualify for accelerated depreciation under Section 179.

Additionally, bonus depreciation can be claimed on 80 percent of qualified new or used property placed in service during the year, and the first year bonus depreciation on passenger automobiles (vehicles with gross vehicle weight less than or equal to 6,000 pounds) is currently $8,000. Bonus depreciation of 80 percent under the TCJA is available for property placed in service during the 2023 tax year. The definition of “qualified property” for purposes of bonus depreciation has been expanded to include the purchase of used property, so long as the taxpayer has not previously used the property (such as in a sale-leaseback transaction).

Beginning January 1, 2024, bonus depreciation drops to 60 percent of qualified new or used property, and under current legislation will continue to be phased down by 20 percent each year until completely phased out in 2027.

Qualified business property for purposes of bonus depreciation includes, but is not limited to, equipment and tangible personal property used in business, business vehicles, computers, office furniture and land improvements to a business, as long as the recovery period of the property is less than or equal to 20 years.

84. Select the appropriate business automobile. For business passenger cars first placed in service in 2023, the ceiling for depreciation deductions is $12,200. Higher deductible amounts apply for certain trucks and vans (passenger autos built on a truck chassis, including SUVs and vans). Vehicles such as SUVs and vans with gross vehicle weight ratings of between 6,000 pounds and 14,000 pounds are restricted to a first-year deduction of $12,200, in addition to the $28,900 that is permitted to be expensed under IRC Section 179. Automobiles that are used 50 percent or more for business are also eligible for bonus depreciation of up to $8,000. For vehicles placed in service in 2023, the depreciation limitation for passenger automobiles is $12,200 for the year the automobile is placed in service, $19,500 for the second year, $11,700 for the third year and $6,960 for the fourth and later years in the recovery period.

New Vehicle Depreciation in 2023

	2023
	Passenger automobiles	SUVs, vans, trucks
Maximum Section 179 allowed	$0	$28,900
Maximum bonus depreciation allowed	$8,000	80%
Year 1*	$12,200	$12,200
Year 2*	$19,500	$19,500
Year 3*	$11,700	$11,700
Year 4* and later	$6,960	$6,960

*Maximum amount of depreciation if electing out of or not qualifying for bonus depreciation and/or Section 179.

85. Capitalize research and development expenses rather than deduct them. The TCJA made significant changes to research and development (R&D) expenses, which traditionally have been eligible for a write-off in the year incurred. Beginning in 2022, instead of deducting R&D costs when incurred, businesses must now capitalize and amortize over a five-year period for U.S.-based research and a 15-year period for research conducted abroad. These rules also apply to software development costs; however, real estate development and mining industries are exempt and are covered under different code provisions. It is also important to note that, even if the R&D project is abandoned or disposed of, no immediate deduction is available.

86. Defer taxes by accelerating depreciation deductions with cost segregation. Cost segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce the federal and state income taxes they pay on their rental income. Property placed in service after September 27, 2017, with a class life of up to 20 years will generally qualify for bonus depreciation. The bonus depreciation rate decreases from 100 to 80 percent for 2023. The rate will continue to phase out in 20 percent increments through 2026. Therefore, to maximize deductions and bonus depreciation, assets should be placed in service by year-end if possible. Real estate that is nonresidential property is generally classified as 39-year property and is not eligible for bonus depreciation. A cost segregation study allows for the appropriate allocation of costs amongst various class lives and may permit owners to take advantage of greater depreciation deductions (including bonus depreciation). Further, by frontloading allowable depreciation deductions to the early years of the property’s life, reclassification can result in significantly shorter tax lives and greater tax deferrals.

87. Consider simplifying accounting methods. If average gross receipts for the three prior years exceed $29 million in 2023, taxpayers are not permitted to use the simpler cash method of accounting, which could create an additional accounting expense. Similarly, businesses with average gross receipts of over $29 million are not able to account for inventories of materials and supplies, and taxpayers are forced to use the more complex uniform capitalization rules. Under the TCJA, the thresholds for both the cash method of accounting and the uniform capitalization rules were indexed for inflation and have increased from $27 million in 2022. Keep in mind that if your business is considered a tax shelter that you are required to use the accrual method of accounting.

88. Determine the merits of switching from the accrual method to the cash method of accounting. The cash method allows for businesses to deduct expenses when paid, whereas the accrual method deducts expenses when either economic performance has occurred or all events have been met. The accrual method of accounting is generally used by businesses that sell merchandise to account for revenue and inventory related to the merchandise. While this may provide a more complete picture of the financial status of a business, from a tax perspective it provides much less flexibility in terms of planning options and is more difficult to use than the cash method of accounting. The good news is that for 2023, businesses with average gross receipts over the last three years of $29 million or less that would otherwise be required to use the accrual method of accounting can elect to use the cash method. A C corporation that is a qualified personal service corporation is also allowed to use the cash method, as long as it does not maintain inventories for tax purposes, regardless of annual gross receipts. While there are some caveats to obtaining this relief, it is a tax-saving strategy worth considering if your business can meet the average gross receipts test and is currently using the accrual method of accounting.

89. Select the most tax-efficient inventory method. If your business tracks inventory, you may be able to realize meaningful income tax savings based on your selected inventory method. For example, in a period of rising prices, like we are currently in, using the last in, first out (LIFO) method can produce income tax savings since it assumes that the higher priced inventory units purchased last were the first ones sold. Conversely, in a period of falling prices, the first in, first out (FIFO) method will provide larger tax savings since it assumes that higher priced inventory units purchased first are the first ones sold. The IRS requires you to select an inventory method the first year your business is in operation. If you decide to make a change, you must alert the IRS and gain approval for the first tax year that you adopt the new method. Professional assistance may be needed.

90. Establish a tax-efficient business structure. The structure of your business can impact your personal liabilities as well as your tax liabilities. Businesses may operate under various structures, including general partnership, limited liability company, limited liability partnership, S corporation, C corporation and sole proprietorship. In particular, the C corporation has a structure that can cause double taxation, especially upon the sale of a business. While the primary factors that distinguish one structure from another are often owner liability and income taxation, it is prudent to consider other characteristics as well. Some of the more pertinent considerations are summarized in the chart below. The entity selection decision should be carefully evaluated by you and your team of legal and tax advisers as it is one of the first and most important decisions made when setting up a business.

Considerations When Choosing Business Entity

	C corporation	S corporation	Sole proprietor	Partnership	Limited liability company
Limit on number of owners	No limit	100	One	Two or more	No limit
Type of owners	No limitation	Certain individuals, estates, charities and S corporations	Individual	No limitation	No limitation
Tax year	Any year permitted	Calendar year	Calendar year	Calendar year	Calendar year
How is income taxed	Corporate level	Owner level	Individual level	Owner level	Owner level, unless treated as an C corporation
Character of income	No flow through to shareholders	Flow through to shareholders	Taxed at individual level	Flow through to partners	Flow through to members
Net operating losses	No flow through to shareholders	Flow through to shareholders	Taxed at individual level	Flow through to partners	Flow through to members
Payroll taxes	Shareholder/officers subject to payroll taxes only on compensation	Shareholder/officers subject to payroll taxes only on compensation	Active owner subject to self-employment taxes on all income; no unemployment tax	Active general partner subject to self-employment taxes on all income; no unemployment tax	Active member subject to self employment taxes on all income; no unemployment tax
Distributions of cash	Dividends to extent of earnings and profits	Typically not taxable until accumulated adjustment account is fully recovered	No effect	No effect except for calculation of basis	No effect except for calculation of basis
Distribution of property	Dividend treatment, gain recognition to entity	Gain recognition to entity	No effect	No gain or loss to entity	No gain or loss to entity

 

91. Ensure your S corporation is paying reasonable compensation. The tax law requires an S corporation pay their shareholder/employees a reasonable compensation for their services to the S corporation. The compensation paid is treated as wages subject to employment taxes. If the S corporation does not pay a reasonable compensation for shareholder/employee services, the IRS may treat a portion of the S corporation's distributions to the shareholder as wages and impose Social Security and Medicare taxes on the adjusted wages.

With the passage of the Inflation Reduction Act and the infusion of cash into enforcement procedures, reasonable compensation examinations are projected to increase in the coming years. This makes it a great time to check or double check that your S Corporation is paying reasonable compensation.

92. Consider the benefits of establishing a home office. With more people now working from home than ever before, taxpayers may wonder if they qualify for the home office deduction. Those taxpayers who own small businesses or are self-employed and work out of their home may very well have the ability to take advantage of the home office deduction if they heed the rules below. Currently, W-2 employees do not qualify to take the home office deduction.

Expenses related to your home office are deductible as long as the portion of your home that qualifies as a home office is used exclusively and on a regular basis as a principal place of business. This can be broken down into a few factors:

1. You must use part of the home or apartment on a continuous, ongoing or recurring basis. Generally, this means a few hours a week, every week. A few days a month, every month, may do the trick. But occasional, “once in a while” business use won't do.
2. To qualify under the exclusive use test, you must use a specific area of your home or apartment only for your trade or business. The area used for business can be a room or, preferably, a separately identifiable space. It cannot be the kitchen table, family room, den or playroom where clearly other nonbusiness activities occur.
3. The area must be a place where you meet or deal with clients in the normal course of your trade or business, and the use of your home is substantial and integral to the conduct of your business. Incidental or occasional business use is not regular use, but this test may be met even if you also carry on business at another location.

A simplified home office deduction ($5 per square foot, up to 1,500 square feet) is also available to taxpayers, which minimizes expense tracking while providing a flat rate deduction per square foot of office space. In addition to claiming a deduction for home office expenses, the ability to qualify as a home office may enable you to deduct the cost of traveling between your home and other locations where you conduct business.

93. Take a closer look at your independent contractors and employees to ensure correct classification. While hiring workers for your business seems simple enough, the question of whether a worker is an independent contractor or employee for federal income and employment tax purposes is a complex one. It is intensely factual, and the consequences of misclassifying a worker can be serious. In general, the person (or entity) who controls how a job is performed is the employer. There are many factors requiring assessment to properly determine degree of control, as discussed below. Therefore, if the worker has control, the worker is self-employed and an independent contractor subject to self-employment taxes. On the other hand, if a worker is an employee, the company must withhold federal income and payroll taxes, pay the employer’s share of Federal Insurance Contributions Act taxes on the wages plus Federal Unemployment Tax Act tax, and often provide the worker with fringe benefits that are made available to other employees. There may be state tax obligations as well. Since these employer obligations do not apply for a worker who is an independent contractor, the savings can be substantial.

94. Maximize business deductions and minimize employee taxable income by establishing an accountable expense reimbursement plan. An accountable plan reimburses employees for work-related expenses by utilizing specific reporting, substantiation of business expenses and return of any excess cash advances. Employers are allowed to deduct, and employees allowed to exclude from gross income, employer expense reimbursements if paid under an accountable plan. Since both the employer and employee benefit from establishing an accountable plan, the need to specifically track expenses is usually worth the minimal extra effort over a nonaccountable plan.

95. Employ your child or grandchild to increase tax savings. By employing your children or grandchildren, you are able to shift income from you to them―which typically subjects the income to the child’s lower tax bracket and may actually avoid tax entirely (due to the child’s standard deduction). Since this is not investment income, the earned income is not subject to the kiddie tax. There are also payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both Social Security and Medicare taxes, while payments for the services of a child under the age of 21 are not subject to Federal Unemployment Tax. Payments to children by a corporation or partnership are not exempt from these payroll taxes, however. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. (See item 43.)

96. Don’t overlook your business tax credits. Credits are dollar-for-dollar reductions in tax and are much more valuable than deductions. Employers can claim the work opportunity tax credit, which is equal to a percentage of wages paid to employees of certain targeted groups during the tax year. Other credits, such as the retirement plan tax credit, may also be available, but certain actions must take place before year-end to qualify. Employers can also receive tax credits for other employee-provided services such as child care facilities/services, making improvements so businesses are accessible to persons with disabilities, and providing health insurance coverage to employees. Credits are also available for paid family and medical leave if an employer has written policies in place.

97. Conduct a research and development study to maximize your R&D tax credit. The R&D credit may be claimed by taxpaying businesses that develop, design or improve products, processes, formulas or software. Many states also have an R&D credit. More industries and activities now qualify for the R&D tax credit than ever before. The credit is even available for professional firms that develop or improve software for use in their business. Businesses of all sizes should consider a formal R&D study, especially in light of the five-year amortization requirement, to ensure property tax compliance as well as maximization of R&D credit potential.

98. Generate payroll tax credits with the R&D tax credit. While it is generally known that the R&D tax credit can be applied to income taxes and the AMT (as long as certain requirements are met), qualified small businesses can also use the R&D tax credit against their Social Security payroll taxes. To qualify for this credit, a small business must: (a) have gross receipts of under $5 million for the current tax year; (b) have had gross receipts for five years or less, including the current year; (c) have qualifying research activities and expenditures; (d) have R&D credits it can use in that year; and (e) incur payroll tax liabilities. Businesses can generate up to $250,000 in payroll tax credits per year for five years, and any unused portion can be carried forward to future years. The payroll tax offset is available on a quarterly basis beginning in the first calendar quarter that begins after a taxpayer files their federal income tax return. The payroll tax credit election may especially benefit eligible startup businesses having little or no income tax liability. Contact us or your qualified tax professional for assistance in determining activities eligible for these incentives and the assessment of the appropriate documentation required to support your claim.

99. Perform a compensation study. Businesses can maintain deductibility, yet avoid payroll taxes, on compensation moved from salary to fringe benefits. Employees will enjoy the tax savings resulting from lower taxable compensation. Benefits typically shifted include medical insurance and employee discounts. This may be a positive way to attract and retain employees. It is important to note, however, that transportation fringe benefits are not deductible by the employer unless included in the employee’s W-2 wages.

100. Enhance employee health by establishing health savings accounts (HSAs) and other cafeteria plans (i.e., Section 125 plans or flexible spending accounts). A Section 125 plan, also known as a cafeteria plan, is a written plan maintained by an employer allowing eligible employees to access certain benefits. These plans provide an IRS-approved way to lower taxes for both employers and employees, since they enable employees to make pre-tax contributions from their paychecks for adoption expenses, certain employer-sponsored insurance premium contributions, dependent care costs and unreimbursed medical expenses. Furthermore, Section 125 plans are permitted to offer salary-reduction HSA contributions for eligible employees as part of the menu of plan choices. Thus, employers can sponsor the HSAs and employer contributions are not subject to income or employment taxes.

Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes, with the notable exceptions of California and New Jersey (at maximum rates as high as 11 percent), resulting in a tax savings of as much as 55.65 percent. As a result, the employer also pays less in Social Security matching tax. Like an accountable expense reimbursement plan, it can assist an organization in achieving its strategic goals by enhancing its ability to attract and retain talented, experienced people. Since many restrictions apply, you should carefully review this arrangement before instituting a plan.

101. Draft a succession plan. Every business owner should have a strategy in place for the transfer of the business to new ownership in the event of the owner’s death, disability or retirement. Failure to properly plan for an ownership transition cannot only turn a successful business into a failed business, it can also create a greater tax burden on the owner or their heirs. You will need to identify candidates for leadership as well as ownership roles, while also considering estate and gift tax consequences. Together with your lawyer, CPA and financial advisers, you can transfer control as desired, develop a buy-sell agreement, create an employee stock ownership plan and carry out the succession of your business in an orderly fashion.

102. Deduct your business bad debts. It is prudent to examine your receivables before year-end if your business uses the accrual method of accounting, as business bad debts are treated as ordinary losses and can be deducted when either partially or wholly worthless. Do not pour salt into the wound by paying income tax on income you will never realize; not being paid for services or merchandise that you have sold is bad enough.

103. Do not become trapped by the hobby loss rules. If your business will realize a loss this year, you need to consider the so‑called hobby loss rules to ensure that the business is treated like a business, not a hobby, and that the loss will be deductible. If an activity results in a profit in three out of the last five years, it is generally presumed to be a for-profit venture and not a hobby. Even if the activity is not for profit, the income must be included on your tax return, though in this case, the income may not be subject to self-employment taxes.

104. Sell your company’s stock, rather than its assets. If you are considering selling your business, you may wish to structure the transaction as a sale of the company’s stock rather than a sale of the company’s assets. A sale of your company’s stock will be treated as the sale of a capital asset and the preferential long-term capital gain rates will apply. A sale of the company’s assets, on the other hand, will typically result in at least some of the gain being taxed at the much higher ordinary income tax rates. However, since the buyer will generally want to structure the transaction as a purchase of the company’s assets in order to increase his or her depreciation deductions, some negotiating by both parties should be expected. The sale of a business is a complex transaction and you should consult your legal and tax professionals when considering a sale.

While the potential taxes from selling your business can be daunting, deferring the gain or spreading income over a few years through an installment sale could prove useful and benefit both parties involved.

105. Consider installment sale treatment for sales of property at a gain. When property is sold, gain is generally recognized in the year of sale. The installment sale provisions can delay the tax impact of the sale until the funds are collected. The installment method is required for cases where there is a sale of property and the seller receives at least one payment after the year in which the sale occurs. This method typically defers a substantial part of the tax on the sale to later years. Under the installment method, gain is recognized ratably over multiple years on the sale to the extent that payments are made on the installment note, subject to a gross profit computation. This allows the gain to be recognized only to the extent of payments actually received and is a valuable method to defer income. If cash proceeds are received over multiple years and you prefer not to use the installment sales method to report the income, an election is available to “elect out” of the installment sale treatment and pay the entire amount of tax due in the year of sale. You have until the due date of your return (including extensions) to elect out of installment reporting. In addition, not all states allow this type of gain treatment, so state tax effects also need to be considered.

106. Set up a captive insurance company to realize insurance cost savings. For certain groups, setting up a small “captive” insurance company, which is owned and controlled by the insureds, may result in insurance savings, particularly when there is a high loss ratio anticipated from claims. In addition, small captives qualifying under IRC Section 831(b) (known as “microcaptives”) pay income tax only on investment income, not underwriting income, and have dividends taxed as qualified dividends. Note that Section 831(b) does contain some restrictions; for example, the insurance company must have net written premiums (or, if greater, direct written premiums) for the taxable year that do not exceed $2.2 million. Generally, these captives are set up among related companies, companies within the same industry or companies affiliated with some association. Microcaptive insurance companies continue to come under increased IRS scrutiny, so it is imperative that you consult with professionals before setting one up.

107. Lease modifications may generate unintended tax consequences. With the fluctuating real estate market of the past few years, many businesses have entered into lease modification negotiations with their landlords. However, businesses should look at potential tax impacts. IRC Section 467 was originally enacted as an anti-abuse provision to prevent tax shelters that took advantage of certain timing differences. Leases can be governed under Section 467 in the event of modification and can result in the inclusion of income if lease terms are substantially modified by:

• Increasing/decreasing the lease payments;
• Shortening/extending the lease term; and/or
• Deferring/accelerating lease payments due.

Moving forward, lease modifications will remain a very complicated issue. It is important to remember that regardless of what the modifications are, leases must be reported on an accrual basis. Comprehensive contract analysis and Section 467 testing will be required on a case-by-case basis as lessors and lessees continue to modify leases to get the best deal.

108. Fly solo with a one-participant 401(k). A solo 401(k) is a one-participant 401(k) similar to a traditional 401(k), except that it covers only the business owner or owner plus spouse. For the most part, these plans have the same rules and requirements as any other 401(k) plan. The business owner is both employee and employer in a 401(k) plan, and contributions can be made to the plan in both capacities allowing for employer contributions, elective deferrals and catch-up contributions. For 2023, the solo 401(k) total contribution limit is $66,000, or $73,500 if you are age 50 or older. The owner can contribute both:

• Elective deferrals up to 100 percent of compensation (earned income in the case of a self-employed individual) up to the annual contribution limit ($22,500 for 2023, plus $7,500 if age 50 or older); and
• Employer nonelective contributions up to 25 percent of compensation as defined by the plan (for self-employed individuals the amount is determined by using an IRS worksheet and in effect limits the deduction to 20 percent of earned income).

109. Document your business expenses. For every item you put on a tax return, you should be ready to prove that item’s validity to the IRS, state or even local tax authority. In particular, certain expenses like travel, meals, transportation expenses, gifts, entertainment (if applying to state or wages of employee) and those expenses associated with listed property (e.g., vehicles) are subject to more specific and demanding rules regarding substantiation and documentary evidence. Deductions in these categories can be disallowed, even if valid, if contemporaneous evidence is not properly maintained for the expense that includes:

1. The amount of the expense,
2. The time and place of travel,
3. The business purpose,
4. For gifts, the date and a description of the item given and the business relationship to the taxpayer of the person receiving the gift, and
5. The business relationship to the taxpayer of the person receiving the benefit.

110. Claim a small businesses credit for starting a pension plan. In the current environment where retaining good employees is critical for business survival, Congress has allowed a credit equal to 50 percent of certain costs incurred when setting up a pension plan for employees. The credit is generally limited to $250 per employee per year, but the limit is no less than $500 and no more than $5,000. So, if you spend $12,000 this year in establishing a plan and $11,000 in the next two years on administration and employee education, you would be eligible for a $500 credit against your taxes in each of those three years if you have one employee, a $1,250 credit if you have five employees, and a $5,000 credit if you have 25 employees. (Before 2020, the limit was $500 a year and did not increase based on the number of employees.)

To qualify for this credit, taxpayers must:

• Have no more than 100 employees who received at least $5,000 of compensation in the year before starting the plan;
• Have at least one employee participate in the plan who meets the definition of a “nonhighly compensated employee”; and
• Not have had a pension plan during the three tax years right before the year in which the plan starts.

111. Reward past employee education with an excluded tax benefit. Do you want to help ease the minds of your employees while retaining their talent and recognizing the costs incurred for them to obtain that talent? Ask your tax adviser about a 127 plan!

A 127 plan is a tool available to any employer for offering tax-exempt tuition benefits to their employees. Through 2025, this plan allows employers to exclude from an employee's gross income any payments made by an employer of principal or interest, up to $5,250, on any qualified education loan incurred by the employee. To qualify, the employer is required to inform all eligible individuals, ensuring that there is no discrimination in favor of highly compensated employees or the restricted ownership class. Qualified student loan payments must be aggregated with any other educational assistance received by the employee when applying the statutory maximum of $5,250.

112. Utilize a private foundation to accomplish charitable goals. While donor-advised funds are increasingly popular among philanthropic individuals, private foundations may offer certain advantages to families looking to create a multigenerational plan for charitable giving. Since private foundations can exist in perpetuity, they are an excellent vehicle to carry on a founder’s family name. Generally, donor-advised funds are not legally separate from the 501(c)(3) sponsoring organization and may have time limits. Further, while donor-advised funds usually follow a donor’s direction in gift giving, they are not legally required to follow those wishes. Private foundations may provide donors with greater flexibility in gift giving.

Donors can realize immediate tax benefits through an income tax deduction when contributing cash amounts to a private foundation. This deduction can be up to 30 percent of adjusted gross income (AGI). For noncash contributions, the deduction is capped at 20 percent of AGI in most instances. However, in certain cases, a conduit (pass-through) foundation can be used, which would allow charitable deductions of up to 60 percent of AGI.

113. Beware of the recapture of tax benefits on property not used for an exempt purpose. When a donor makes a charitable contribution of tangible personal property that is not used for exempt purposes and the donor originally claimed a deduction for the fair market value of the property, the donor’s tax benefit may need to be adjusted.

If a donee organization disposes of applicable property within three years of the contribution of the property, the donor claimed a deduction of more than $5,000, and the organization does not certify that the property was substantially used for the organization’s exempt purpose or the intended use became impossible, the donor is subject to a tax benefit adjustment.

If the donation is significant, the donor may consider formalizing the donee organization’s strategy regarding the property or ask the donee organization to indemnify the donor.

A $10,000 penalty applies if a person fraudulently misidentifies property as having a use that is related to either a purpose or function of the organization. Such a situation may require the donor to recapture a portion of the deduction, and include in income the difference between the amount previously claimed as a deduction less the donor’s basis in the property when the contribution was made (the built-in gain).

114. Confirm that your private foundation meets the minimum distribution requirements. All private foundations are required to distribute approximately 5 percent of the average fair market value of their assets each year. Qualifying distributions meeting this requirement include grants, administrative expenses related to the charitable activity and other specified operating expenses. The foundation has 12 months after the close of the tax year to make their qualified distribution. If the distribution requirement is not met within that timeframe, an excise tax of 30 percent will be imposed.

115. Review your estate planning documents. At year-end, individuals are presented with a strategic opportunity to evaluate their wealth and estate planning strategies. Considering the potential expiration of key provisions in the TCJA, estate plans should be crafted with maximum flexibility. Formula bequests need scrutiny to ensure their relevance under current and expected future laws. Additionally, contemplating the granting of limited powers of appointment to trust beneficiaries can offer post-mortem tax planning flexibility.

There has been a lot of speculation regarding potential legislation and significant reductions to the federal estate, gift and generation-skipping transfer unified credit that was previously doubled by the TCJA. While proposed changes may have been abandoned, at least for the time being, the increased exemptions are still scheduled to sunset in just over two short years. In anticipation of the future changes, if you have not examined your estate plan within the last few years, you should consider doing so immediately. Without intervention, the favorable changes enacted by the TCJA will lapse back to their pre-2018 amounts at the end of 2025 (the unified credit will be reduced by over $6 million after considering inflation).

While addressing your will, also consider the benefits of a living will, medical power of attorney, healthcare directives, durable power of attorney and the appropriateness of your beneficiary designations on your retirement accounts and life insurance policies.

116. Take advantage of high exclusions. As discussed above, in 2023, individuals now have the option to give up to $17,000 per year to another individual without impacting their lifetime exemption ($34,000 for married couples). This limit will rise to $18,000 ($36,000 for couples) in 2024. Such gifts can be transferred directly to the donee or directed into trusts, custodial accounts or 529 college savings plans. Notably, the latter choice permits the frontloading of up to five years' worth of annual exclusions. The estate and gift tax unified credit amounts are also subject to inflation adjustments and will rise to $13.61 million in 2024. For both simple and complex trusts, grantors should consider funding in 2023 or 2024 to take advantage of this credit, since it is scheduled to sunset on January 1, 2026.

117. Consider gifting income-producing or appreciated property. By gifting income-generating or appreciated property in lieu of cash, the donor can accomplish three important benefits. First and most importantly, the gift will serve the purpose of assisting the donee. Second, if the donee is in a lower tax bracket than the donor or exempt from the NIIT, the donor and donee will likely experience some collective tax savings by shifting the income to a lower bracket. Third, the value of the gift is also removed from the transferor’s estate. This is an easy, effective way to pass on wealth.

118. Consider making payments for tuition or medical expenses. Medical and education expenses paid directly to the providing institution are not subject to gift tax and generation-skipping transfer tax rules. Also, any such payments do not count toward the taxpayer’s annual gift tax exclusion. In addition, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment. For example, should a grandparent make tuition payments and utilize up to $16,000 in gift exclusions to a grandchild, the yearly tax savings could be significant. Notably, these payments can be on behalf of anyone and are not restricted to immediate family members.

119. Utilize a spousal lifetime access trust (SLAT) to take advantage of current, high unified credits. As we mentioned previously, it is likely that the unified credit is near its historical peak, with the current credit scheduled to sunset in 2026 and revert to an inflation adjusted $6.8 million. In order to take advantage of the current heightened credit, married persons can each gift the amount of the credit to a SLAT, utilizing the credit on the gift and paying no gift tax. In a SLAT, after the donor spouse gifts to the trust, the donee spouse can request distributions of income or principal from the trust, thus preserving access for the couple to the trust assets, should the need arise. However, if principal is distributed, the SLAT assets distributed will be brought back into the estate, defeating the original intent of forming the SLAT―so exercise caution when taking distributions. Upon the donor spouse’s death, the assets in the trust (and subsequent appreciation) are not subject to the estate tax.

120. Tread carefully when considering the use of a grantor retained annuity trust (GRAT) for inter vivos wealth transfer. In a GRAT, a grantor contributes assets to a trust while retaining annuity payments for a defined period of time, with the remainder payable to beneficiaries. Depending on the structure of the GRAT, one can achieve maximum wealth transfer with little to no gift tax effect or use of the lifetime exclusion. However, should the grantor pass away prior to the completion of the annuity payments under the GRAT, at least a portion and possibly all of the GRAT assets are includible in the grantor’s estate. Thus, by terminating the annuity and trust before December 31, 2025, when the new higher federal estate tax threshold is set to expire, one can reap all of the benefits of a GRAT with minimal risk, while retaining the use of the grantor’s applicable exclusion amount.

121. Retain access to your home while passing it down to the next generation by utilizing a qualified personal residence trust (QPRT). By transferring a house to a QPRT, the grantor can continue to use the residence as his or her own for a specified period, after which the residence passes to the beneficiaries. At this point, and depending on the terms of the trust, the grantors may pay rent to remain in the home. The initial transfer to the QPRT is a taxable gift of the remainder interest in the home, using a rate published by the IRS. A QPRT allows the grantor to gift the home to the trust for a discounted value, using less of the exclusion, and shields future appreciation of the home from the estate tax. This is a particularly effective strategy in a high-interest rate environment because the higher the rate, the higher the present value of the grantor’s right to use the residence―and the lower the value of the gift of the future remainder interest.

122. Gift or sell assets to an intentionally defective grantor trust (IDGT). By gifting assets to an IDGT, donors can effect a completed gift during their lifetime, which would use up some of their gift tax exemption, but shield appreciation in the assets from the estate and gift taxes. Because of this, this strategy is best employed by gifting assets that are expected to increase the most in value.

123. Utilize a charitable remainder trust (CRT) or a charitable lead trust (CLT) to transfer wealth and benefit charity. As you would expect, both trusts involve the donation of a portion of the assets transferred into the trust to charity, but the timing and functions of both are very different. Both a CRT and CLT permit the donor to remove the asset from their estate. The differences arise in the areas of recipients of the annuity payments and the distribution of the remaining funds.

A CRT is created to ensure the donor’s financial future. Under a CRT, appreciating assets such as stocks are contributed to the trust and the donor receives an annuity for a term of years, even though the asset is no longer considered as part of the donor’s estate. Upon the donor’s death, a charitable organization receives the remaining assets.

A CLT is predominantly focused on the tax-efficient distribution of the donor’s wealth to beneficiaries. First, the donor makes a taxable gift equal to the present value of the amount that will be distributed to the remainder beneficiaries. In a CLT, the charities “lead” and receive the annual annuity payments. The amount remaining at the completion of the term is then distributed to the beneficiaries. The benefit of this type of trust is threefold: It allows for the reduction in the value of the settlor’s estate, while also providing for charities and beneficiaries.

124. Review trust residency qualifications often. The most difficult aspect of trust residency is that each state has different rules and qualifications for determining whether a trust is resident or nonresident. For example, most trusts created by a will of a decedent or funded while the donor was considered a resident of Pennsylvania are considered resident trusts. However, a state like Kansas only considers a trust as resident if it is administered in the state. Each state and situation differs for trust taxation and laws are constantly changing. There is a myriad of other factors that may impact the nexus of a trust, such as beneficiary and/or trustee residence. We recommend contacting your tax adviser on any questions regarding trust residency.

125. Set up new intra-family loans while refinancing existing loans. Intra-family loans can still be beneficial for both the borrower/donee and the lender/donor. In this situation, the lender would be required to charge the minimum applicable federal rate. As of December 2023, that rate ranged between 4.82 percent and 5.26 percent, depending on the term. With volatility in the markets and high interest rates, it is not likely that borrowers would choose to invest proceeds and try to “beat” the intra-family loan rate at this time. However, if a donor chose to loan a beneficiary money to buy a home, with average mortgage rates currently anywhere between 6.7 percent and 7.6 percent, there is room to make an arrangement beneficial for both parties. For the donee, if the loan is secured and properly recorded, it could be deductible on their tax return, while likely paying significantly less than what would be charged by a typical lending institution. For the donor in a volatile stock market, the mortgage could very well generate a better rate of return than a standard investment could, all while secured by real property.

126. Consider the benefits of a revocable trust. Generally, wills are drafted to specify how an individual’s assets should be distributed upon their death. However, a revocable trust can provide numerous advantages over a will. One significant benefit is the avoidance of the probate process, which is the process of the legal administration of a person’s estate in accordance with that person’s will or their state of domicile’s law if there is no will in place. Having a revocable trust eliminates any uncertainties that may arise within the probate process. Additional benefits of revocable trusts include the addition of privacy to the estate plan and protections against incapacity.

127. Utilize life insurance properly. Whether intended to pay estate taxes, protect the family of a deceased “breadwinner” or fund ongoing business structures, there are many reasons why taxpayers should obtain life insurance. Typically there are two different types of life insurance policies taxpayers may select: term life insurance, which provides coverage over a specific period of time (the most popular option being “premium level”), and permanent life insurance, which provides coverage until the taxpayer dies or cancels the policy. A few examples of permanent life insurance include whole, universal and variable.

While life insurance may not be for everyone, it is worth looking into to see if your situation would benefit from it. For instance, business owners may want to guarantee they will be able to continue functioning after the loss of an important employee, or ensure survivor income for the deceased’s family. In addition, the business may want to provide inheritance for family members who are not directly involved with the business. In terms of estate taxes, high-net-worth individuals may still be plagued with a financial burden after the death of a taxpayer. Those electing to use insurance proceeds in order to provide cash for the estate tax payment may soften the blow of having to resort to using other tactics, such as liquidating assets.

A taxpayer may also choose to establish an irrevocable life insurance trust, whereby the policy is considered an asset of the trust and ownership is effectively transferred to another person. Then, upon death, the benefits are not included in the decedent’s estate. Otherwise, the life insurance may be taxed in the deceased’s estate based upon the value of the death benefit, even for term insurance.

The advantages of acquiring life insurance within an irrevocable trust can be amplified when a married couple opts for the trustee to purchase a second-to-die life insurance policy. Typically, the cost of such a policy is lower than that of two individual single-life policies. Consequently, with the same premium, it becomes possible to secure a larger amount of coverage. This approach not only provides potential cost savings but also aligns with estate planning strategies, as the death benefit is triggered upon the passing of the second spouse, offering protection for heirs and assets within the trust.

When deciding who should fund the life insurance premiums, keep in mind that if a business owner is funding the premiums, there could be various related income tax issues. In addition, gift tax issues could arise if a life insurance trust is already set in place. For those reasons, it is imperative that taxpayers consult with a trusted tax adviser in order to determine what structure would work best for their specific situation.

128. Minimize the income taxes applicable to estates and trusts. The income tax rates that apply to estates and trusts continue to be significantly compressed. Estate and trust taxable income (exclusive of long‑term capital gain and qualified dividend income) of more than $14,450 for 2023 is taxed at a marginal tax rate of 37 percent. Therefore, it may be beneficial to distribute income from an estate or trust to its beneficiaries for the purpose of shifting the income to a lower tax rate. Additionally, trusts and estates can minimize income taxes by utilizing many of the tax planning strategies that are applicable to individuals, including the “bunching” of deductions and deferral of income strategies noted above in items 14 and 22.

 

129. Consider an election under the 65-day rule. Considering the compressed brackets with extraordinarily high tax rates on income held within a trust or estate, it is advantageous in many scenarios to lessen the total income tax hit for the trust by distributing income to be taxed at the beneficiary level instead of the entity level.

With an election under Section 663(b), complex trust and estate distributions made within the first 65 days of 2024 may be treated as paid and deductible by the trust or estate in 2023. The election of the 65-day rule is an invaluable asset, giving the trustee the flexibility to distribute income after the end of the year, once the total taxable income of the trust or estate can be more accurately determined.

130. Consider private placement life insurance as a hedge fund alternative. Investors with significant income and wealth should consider private placement life insurance (PPLI). This is an unregistered security that typically utilizes strategies associated with alternative investment funds; however such funds are generally subject to high tax rates as many investments are made on shorter time horizons. A PPLI can help reduce the tax cost associated with investment in these funds, as assets can grow in the life insurance policy tax-free. PPLIs may be a particularly attractive alternative for those in states with higher taxes, like New York and California. PPLIs typically require funding of $3 million to $5 million in premiums per year.

131. U.S. citizen residents of a foreign country should consider the foreign earned income exclusion. U.S. citizens who spend a significant amount of time out of the country and meet either the physical presence test or bona fide residence test can exclude up to $120,000 of income and some additional housing costs by using the foreign earned income exclusion. Employees and self-employed individuals can both potentially take advantage of this approach. There are several strategies to avoid double taxation for citizens with foreign income, and this approach is ideal for many of those at an income near the exclusion maximum. Your tax adviser can help you determine if you qualify and if this is the best personalized strategy to utilize.

132. Review your foreign bank account balance during 2023 for FBAR preparation. If you have financial interest, whether direct or as owner of record, or signature authority over foreign financial accounts with aggregate balances over $10,000 at any time during 2023, you are required to file FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Willful failure to report these accounts can result in penalties of up to $156,107 or 50 percent of the account value, whichever is greater, on a per account basis.

Recently, in Bitter v. United States, the Supreme Court held that a nonwillful reporting violation constitutes a single violation, regardless of the number of unreported or incorrectly reported accounts, and not a per account violation, and the penalty for such nonwillful violations is to be capped at $10,000. The applicable sections of the IRM have not been updated yet, but a memorandum (SBSE-04-0723-0034) has been issued advising of the new guidance.

While the reporting of virtual currency was not previously required, the Treasury Department has signaled its intention to amend the disclosure requirements of virtual currency accounts held overseas. FinCen Notice 2020-2 stated that while the current regulations do not define a foreign account holding solely virtual currency as a type of reportable account for FBAR purposes, if the account that holds the virtual currency is an otherwise reportable account, the total holdings must be reported.

If you are required to file an FBAR, in addition to completing Schedule B, Part III (Form 1040), you should also review the filing requirements related to Form 8938, Statement of Specified Foreign Financial Assets. Form 8938, while reporting similar information with respect to foreign financial accounts, has different filing thresholds and slightly different asset reporting requirements than the FBAR.

133. Maximize your foreign tax credit. For many taxpayers, the most exposure to international tax is paying foreign taxes on investment and other income earned abroad. While in many cases the calculation of a foreign tax credit is a straightforward affair, recent and proposed regulations have made modifications to the source-based requirements for certain taxes, as well as calculation of the net income subject to tax, and consequently, the availability of the credit for many taxpayers. An experienced tax preparer can assist to ensure you and your business receive maximum credit for the foreign taxes you pay.

134. Avoid unintentional foreign trusts. Typically, a trust is viewed as a domestic entity for tax purposes if a U.S. court primarily oversees its administration and one or more U.S. individuals have the power to make all significant decisions. Therefore, it is crucial to think about not just the location of the trust’s formation, but also who will be in charge of the trust. If a nonresident alien successor trustee takes over, or even a U.S. citizen if the assets are under foreign court jurisdiction, a U.S. trust could transform into a foreign trust when the original trustee passes away or steps down from their role. This change in classification could lead to significant alterations in U.S. and foreign reporting obligations, and may also have potential implications at the state level.

135. Reevaluate transfer-pricing policies in light of supply chain issues and current market conditions. As we have predicted for the last two years, due to the global pandemic, many multinationals have faced severe disruptions to their global supply chains, resulting in new suppliers, temporary options, alternative means of performance, the restructuring of supply contracts and, in some cases, relocation of operations. In addition, recent surges in interest rates and market volatility may necessitate revisiting the terms and conditions of intra-group transactions. Taxpayers may wish to restructure or reprice interest rates in order to maximize available cash flow or defer certain inter-company payments, as well as increase their competitive position when operating in international jurisdictions. In October 2023, the IRS launched a new “Large foreign owned corporations transfer pricing initiative,” using funds from the Inflation Reduction Act to increase audits of large corporations to ensure that they are paying taxes owed.

While the economic landscape remains uncertain for 2024 and beyond, we do have a great deal of tax certainty as to 2024 and, to a certain extent, 2025. Taxpayers should utilize this clarity in designing a tax plan for the next few years while also preparing for the potential sunset of the TCJA. As we have seen the IRS begin utilizing their increased budget from 2022’s Inflation Reduction Act, taxpayers should ensure that they maintain adequate records and plan for any potential audit scenarios. As year-end plans are developed, caution should be exercised. While many of the 2023 tax savings opportunities will disappear after December 31, 2023, strategies should not be adopted hastily. However, with careful consideration and by investing a little time in tax planning before year-end, you can both improve your 2023 tax situation and establish future tax savings. Without action, however, you may only discover tax saving opportunities when your tax return is being prepared—at which time it may be too late.