2023 General Tax Strategies for Individuals & Businesses

Contribute to a Retirement Plan to Save Taxes

You or your spouse must have earned income in order to contribute to a retirement plan. Taxpayers with modified AGI below certain thresholds are permitted to contribute up to $6,500 to a Roth IRA for 2023, which will increase to $7,000 for 2024. (Taxpayers aged 50 or older are allowed an additional $1,000 contribution.) These amounts begin to reduce for single filers and married couples filing jointly who reach modified 2023 AGI of $138,000 and $218,000, respectively. Thresholds will increase slightly for 2024.

Planning Point: If you would like to contribute to a Roth IRA, but your income exceeds the threshold, consider contributing to a traditional IRA for 2023 and then converting the IRA to a Roth IRA in 2024. Be aware, however, that current law prevents the taxpayer from “unwinding” this Roth conversion.

Self-employed individuals can have a Simplified Employee Pension (SEP) plan, contributing up to 25% of their net earnings from self-employment. The maximum contribution limit for 2023 is $66,000, increasing to $69,000 in 2024. The self-employed may set up a SEP plan as late as the due date of their tax return, including extensions. A 401(k) plan is another option for the self-employed. For 2023, a self-employed individual, as an employee, may defer up to $22,500 ($30,000 for age 50 or older) of annual compensation. Acting as the employer, the individual may contribute 25% of net profits, excluding the deferred $22,500, up to a maximum contribution of $66,000. The 2024 401(k) limits will increase to $23,000 ($30,500 for age 50 or older).

You may make only one IRA rollover by beneficiary per year. This does not limit direct IRA rollovers from trustee to trustee, but only those distributions to the IRA beneficiary who, within 60 days, deposits it into an IRA account. Nor does this rule apply to conversions from traditional to Roth IRAs.

The first IRA distribution and rollover will be tax free, but any subsequent rollovers will be subject to regular tax. If the deposit exceeds the IRA contribution limits, it will be subject to a 6% annual excise tax until corrected.

Revisit Your Estate and Gift Planning Strategies

Taxpayers are permitted to make annual tax-free gifts of up to $17,000 per recipient ($34,000, if married) without filing a gift tax return in 2023. The 2024 annual exclusion will increase to $18,000 per recipient, or $36,000, if married. There are also rules allowing for education-related gifts which may exceed these yearly maximums. By making these gifts annually, taxpayers can transfer significant wealth out of their estate without using any of their lifetime exclusions.

Gifts can be made for more than $17,000. A gift tax return must be filed to track the amount of estate/gift lifetime exclusion used`, which is currently $12.92 million per person ($25.84 million for married couples) for 2023. The estate/gift lifetime exclusion was doubled in 2017 under the TCJA and is set to sunset in 2025 when it is set to return to pre-2017 levels. Don’t wait until 2025 to plan your gifting. Washington State’s 2023 exemption is $2,193,000. Since the Federal Estate rules have changed with the 2017 TCJA, and because Washington State has its own set of estate rules, we recommend that you review your current estate documents.

Trust Beneficiaries

If you are a beneficiary of a trust, you should talk to your trustees to see if distributions are able to be made according to your individual trust agreement. Trust rates are normally higher than individual rates and so distributions could serve to minimize overall taxes.

Review Your Withholding/Estimated Tax Payments

Review your federal income tax withholding between now and the end of the year to avoid the penalty for underpaying your 2023 taxes. Individuals can avoid underpayment penalties if they timely pay the lesser of 90% of their current tax or 100% of their prior year tax liability. If your AGI exceeded $150,000 in 2022, then the safe harbor for 2023 tax payments is 110% of your total 2022 tax, assuming your 2023 income is more than 2022.

Increasing your final estimated tax deposit due January 16, 2024, may reduce some of the penalty but is unlikely to eliminate it entirely. However, withholding payments, even if they are made on the last pay day of the tax year, are deemed as withheld ratably throughout the tax year. You can check your withholding using the IRS Withholding Tool and then updating your Form W-4 if needed. Both the tool and form can be found on the IRS website.

Charitable Donations and RMDs

If you are an individual that is at least 70½ years old and who would like to make a large charitable donation, you may take advantage of the qualified charitable donation from your IRA. Up to $100,000 of a distribution can be directed to the charity of your choice by instructing your IRA trustee to send money directly to this charity. Please note that this can be made at 70½ even if you are not subject to a required minimum distribution age of 72. This is a great planning opportunity if you are claiming the standard deduction.

Timing Your Capital Gain (& Loss) Recognition

Short-term capital gains are taxed at an individual’s ordinary income tax rate. If they hold a capital asset for more than one year, the capital gain is considered “long-term.” Depending on their tax bracket, a long-term capital gain is taxed at 0%, 15%, or 20% (see 2023 table below):

2023 Capital Gains RateSingleJointHead of Household
0%$0 – 44,625$0 – 89,250$0 – 59,750
15%$44,626$89,251$59,751
20%$492,301$553,851$523,051


Remember: capital gains might be subject to an additional 3.8% net investment income tax if your AGI is over $200,000 (single)/$250,000 (joint).

Capital losses, including worthless securities, will offset capital gains. Therefore, triggering tax losses when beneficial from an investment perspective, can help to mitigate overall taxes. If there is a net overall capital loss, only a $3,000 loss can be claimed per year ($1,500 if married, filing separately) and the excess losses carry forward into the future.

Be careful not to violate the “wash sale” rule by buying an asset nearly identical to the one you sold at a loss within 31 days before or after the sale. Otherwise, the wash sale rule will prevent you from claiming the loss immediately.

If you sell your principal residence before year end, up to $250,000 of your gain is exempt from tax under current law ($500,000 for joint filers). The IRS requires you to have used the property as your main home for at least two of the last five years to qualify for this treatment.

Washington State 7% Capital Gains Tax: The 2021 Washington State Legislature previously passed a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments. The Washington Supreme Court upheld the tax as constitutional, though there is a petition filed with the U.S. Supreme Court to weigh in. Beginning January 1, 2022, Washington residents with long-term capital gains over $250,000, with some exceptions, are subject to the new capital gains tax.

Timing of Income & Deductions

Income Planning

To the extent that you can smooth income and not jump into a higher bracket, there is an advantage to timing your income. Under the current tax rates and brackets, individuals will be in the 37% tax bracket when their income reaches $578,126 (single)/$693,751 (joint).

If you are subject to multiple types of layered income taxes, planning your income becomes a valuable exercise. Specifically, planning is recommended for individuals when considering the net investment income tax, the additional Medicare tax, and alternative minimum taxes.

Please view our complete list of updated thresholds for 2023 and 2024 in Addendum C to see if your income is nearing these thresholds.

Deduction Planning

Remember that prepaying certain itemized deductions might not lower your overall tax due to AMT or the deduction limitations set by the tax, but this can be a helpful strategy for reducing taxes. Instead of prepaying, you may want to consider bunching itemized deductions into one year to take maximum advantage of the deductions in year one and plan on taking the standard deduction the following year. Please contact us to help you analyze the tax effects of prepaying tax-deductible items. The following expenses are commonly paid as part of year-end tax planning:

  • Charitable contributions:
    • Cash contributions to qualified charities can be deducted up to 60% of your adjusted gross income (AGI).
    • Noncash gifts made are limited to 50% of your AGI.
    • Gifts of appreciated property held over one year can be deducted up to 30% of your AGI (20% for gifts to private operating foundations). Avoid paying capital gains tax by gifting the securities, rather than gifting the sales proceeds. Also, consider using a donor advised fund to utilize a bunching strategy for making charitable contributions.
  • Mortgage interest: Your ability to deduct prepaid interest is limited and the IRS is matching the information on the bank’s Form 1098-INT. Home loan interest is allowed for loans up to $1 million for pre-December 15, 2017 loans and after that date for loans up to $750,000.
  • Medical expenses: Qualified unreimbursed medical expenses must exceed 7.5% of your AGI to be deductible.

Individual Tax Credits!

The Inflation Reduction Act (IRA) of 2022 brought about several credits that individual income taxpayers have access to beginning in 2023. These credits primarily focus on clean vehicle purchases and home energy improvements. Below is a summary table outlining these benefits:

Tax CreditSummary
Clean Vehicle CreditQualification: Purchase of a new, qualified plug-in electric vehicle (EV) or fuel cell electric vehicle (FCV).

Amount: Up to $7,500, varying based on the vehicle’s battery capacity and other criteria.

Income Limits: $300,000 for married filing jointly, $225,000 for heads of households, $150,000 for other filers.
Energy Efficient Home Improvement CreditQualification: Expenses on exterior doors, windows, skylights, insulation, central air conditioners, water heaters, furnaces, boilers, heat pumps, biomass stoves, boilers, and home energy audits for primary residences, second homes, and rentals.

Amount: 30% of total improvement expenses, up to $1,200 annually (separate $2,000 limit for certain items), no lifetime limit (2023-2032).

Restrictions: Not available for non-residential properties.
Residential Clean Energy CreditQualification: Expenses on solar, wind, geothermal power generation, solar water heaters, fuel cells, and battery storage.

Amount: 30% of total improvement expenses with no annual or lifetime limit (2022-2032), reducing to 26% in 2033 and 22% in 2034.

Restrictions: Applicable only to residential properties.


These credits are part of the U.S. government’s efforts to encourage energy-efficient and environmentally friendly practices among individual taxpayers.

General Tax Strategies for Business Owners

Special 100% Bonus Depreciation: In 2022, businesses were able to deduct 100% of the cost of new OR used business assets purchased and placed in service during the year. In 2023, the deduction has been phased down to 80% with the remaining costs being depreciated over the useful life of the asset. The deduction will be phased down further to 60% in 2024, 40% in 2025, and 20% in 2026.

Section 179 Deduction: Section 179 allows businesses to expense the full cost of new or used equipment. The 2023 limit is $1,160,000 for qualifying property. Section 179 expensing is subject to phase outs if a business added more than $2,890,000 of assets; the deduction is reduced dollar for dollar.

Section 1202 Qualified Small Business Stock: Taxpayers may exclude 100% of the gain on the sale or exchange of Qualified Small Business Stock held over five years. Certain restrictions apply in determining eligibility of the stock, and the exclusion from gross income is limited to the greater of $10,000,000 or ten times the taxpayer’s stock basis.

Section 199A Qualified Business Income Deduction: Taxpayers who have qualified business income (QBI) related to their pass-through activities or solely owned businesses may qualify for the deduction. While subject to several limitations and exceptions, many taxpayers will be able to deduct up to 20% of their QBI.

Repair Regulations: Under the De Minimis Safe Harbor rules, taxpayers may deduct up to $2,500 per invoice for items related to repairs or improvements of property. Due to the complexity of these rules, you should discuss any plans you may have with us.

Multistate Activity: Clients with sales in multiple states should remain aware of the rules and economic nexus thresholds for each state. Behind the authority of the 2018 Wayfair decision, states have become more assertive in subjecting business located outside of their borders to sales tax. In addition, the states have begun applying the theory of the decision to income tax requirements within the state.

Changes to R&D Expenses and Credits:

The 2017 Tax Cuts and Jobs Act (TCJA) contained a provision that, effective January 1, 2022, research and development (R&D) expenses are no longer immediately deductible in the year incurred. Instead, these costs must be capitalized and amortized over five or 15 years.

  • R&D performed within the U.S. are recovered over 5 years.
  • R&D performed outside the U.S. are covered over 15 years.
  • Increase in research credit against payroll tax for small businesses. The limit on the amount of research credit that qualified small businesses may elect to treat as a credit against their payroll tax liability increased from $250,000 to $500,000 for taxable years beginning after 2022.

Business Tax Credits!

The Inflation Reduction Act (IRA) of 2022 introduces several tax benefits and credits for businesses, aiming to encourage sustainable practices and greater energy efficiency. Below is a summary table of these benefits:

Tax CreditSummary
Restoration and extension of the renewable electricity production tax credit (PTC) and the investment tax credit (ITC)The act extends the PTC for renewable energy projects that begin construction through the end of 2024.

Facilities that pay prevailing wages during construction and for the first decade of operation, and fulfill apprenticeship requirements, can qualify for up to five times the base amount of the credit. Increased credit amounts apply to domestic content, energy communities, and hydropower facilities placed in service after 2022.

Restrictions: Not available for non-residential properties.
Business credit for commercial clean vehiclesQualification: The IRA provides a new business credit for qualified commercial clean vehicles in an amount equal to the lesser of:

Amount: 15% (or 30% for a vehicle not powered by a gas or diesel internal combustion engine) of basis, or the incremental cost of the vehicle (excess of the purchase price of such vehicle over the purchase price of a comparable vehicle).
The credit is worth a maximum of $7,500, or $40,000 for a vehicle with a gross vehicle weight rating of at least 14,000 pounds.

Restrictions: The credit is set to expire after 2032.
Clean fuel production creditQualification: The IRA creates a new business credit for clean fuel that a business produces at a qualifying facility and sells for qualifying purposes.

Amount: The fuel must meet certain emissions standards. The credit per gallon base amounts are $0.20 (non-aviation fuel) and $0.35 (aviation fuel). Increases are available if the business meets prevailing wage and apprenticeship requirements. All amounts are adjusted for inflation.

Restrictions: The credit applies to clean fuel produced after 2024 and sold before 2028.
Clean electricity investment creditQualification: The IRA creates a new investment credit for clean electricity property investments in energy storage technology and qualified facilities placed in service after 2024, where the greenhouse gas emissions rate is not greater than zero.

Amount: The base credit rate is 6% of the qualified investment, with increases available if specific requirements related to construction date, output, and wages, among other factors, are met.

Restrictions: The credit begins to phase out one year after the latter of 2032, or the year when annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of the emission rate for 2022.
Clean electricity production creditQualification: The IRA creates a new business credit for producing clean electricity for facilities placed in service after 2024, where the greenhouse gas emissions rate is not greater than zero.

Amount: The credit equals the kilowatt hours of electricity produced and sold, multiplied by a base amount of 0.3 cents or 1.5 cents (adjusted for inflation).
Increased credit amounts are available if certain wage and apprenticeship requirements are met.

Restrictions: The credit begins to phase out one year after the latter of 2032, or the year when annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of the emission rate for 2022.


Conclusion

As new tax regulations come into effect each year, your safest course of action is to keep apprised of any changes that may impact your personal situation. Feel free to give us a call with any questions you have. Remember, the IRS issued a Taxpayer Bill of Rights to help you better understand your rights in dealing with the U.S. tax system. However, if you receive any IRS correspondence, do not ignore this notice. You should contact your tax professional to appropriately respond to this notice to avoid or reduce potential charges. We would be happy to set up a meeting or assist you in any additional ways that we can.

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