Tax Planning for Individuals

Annual gift exclusion and estate tax exemption

The annual gift exclusion for 2023 is $17,000 per person and will increase to $18,000 in 2024. Married couples who elect to gift split can give $34,000 per person in 2023 and $36,000 in 2024.  There are no  limits on how many donees can receive gifts in a calendar year, and there are no gift tax filing requirements if the annual cash gift exclusion per person limit is not  exceeded.

There is also an unlimited gift exclusion for payments made on behalf of a donee as medical payments or tuition paid to an educational institution, if the payment is made directly to the medical care provider or educational institution.

For 2023, the unified gift and estate tax exemption is $12,920,000 per individual.   For 2024, the exemption will increase to $13,610,000.

The estate exemption though is expected to be cut in half as of January 1, 2026.  Given impending changes,  high net worth individuals and families should revisit their estate planning.

Unused 529 account balances to Roth IRA conversion

Starting in 2024, individuals with outstanding balances in their 529 college savings accounts can roll over their savings to a Roth IRA under the SECURE Act 2.0. To qualify for this provision, the 529 plan must be open for at least 15 years and the contributions made to the 529 plan must be at least 5 years old. Any 529 contributions made by the taxpayer in the last 5 years cannot be transferred to a Roth IRA account. There is a lifetime limit of $35,000 per beneficiary that can be rolled into the new Roth IRA account. Transfers must be made from plan to plan or trustee to trustee. The taxpayer cannot touch the monies by writing a check from the 529 plan into the Roth IRA account. The Roth IRA account must also be in the name of the 529 plan beneficiary.

Charitable contributions

Cash or property can be donated to charity with a deduction for the property’s fair market value. However, in some instances, your deduction may be limited to the property’s cost basis. If an individual’s charitable contributions exceed the applicable percentage limits, any excess contributions can be carried forward and deducted over the following five tax years.

Percentage limits for Tax Year 2023 are as follows:

• 60 percent of an individual’s contribution base for cash contributions made to public charities in 2018 through 2025.
• Contributions of capital gain property to public charities are generally limited to 30% of the individual donor’s contribution base.
• Contributions of capital gain property to semi-public charities and to private charities are limited to 20% of the contribution base.
• Contributions of cash and non-appreciated property “for the use of” a charitable organization are subject to the 30% limitation on the charitable contributions deduction.

Individuals ages 70 ½ and up can direct up to $100,000 per year from their traditional IRAs to operating charities through qualified charitable deductions (QCDs).  The QCDs can be used to satisfy all or part of the donor’s required minimum distribution (RMD) for 2023 and is not considered income for the donor.

Teacher expenses

For 2023, educators that buy books, supplies, COVID – 19 protective items and other classroom materials can deduct up to $300 for these out-of-pocket expenses per individual or the maximum of $600 for married couples who are both eligible educators.

Bonus depreciation

Tax year 2022 was the last year to take 100% bonus depreciation. In 2023, businesses can write off up to 80% of the purchase price of an asset placed into service in the calendar year, and then depreciate the remaining 20% cost of the property over the course of several years.

To qualify for bonus depreciation, the property must have a useful life of 20 years or less and not be real property.

First year bonus depreciation decreases as follows:

• 80% for property placed in service after December 31, 2022 and before January 1, 2024.
• 60% for property placed in service after December 31, 2023 and before January 1, 2025.
• 40% for property placed in service after December 31, 2024 and before January 1, 2026.
• 20% for property placed in service after December 31, 2025 and before January 1, 2027.

Standard mileage rates

The 2023 Standard mileage figures are as follows:

• 5 cents per mile for business purposes.
• 22 cents per mile for medical and moving purposes (only for qualified active-duty members of the Armed Forces).
• 14 cents per mile for charitable purposes.

Child tax credit

The 2023 child tax credit is worth up to $2,000 per qualifying dependent under the age of 17. The credit is nonrefundable, but some taxpayers may be eligible for a partial refund of up to $1,600 through the additional child tax credit when they file in 2024.

In addition, children who are 17 years old do not qualify for the credit.

Retirement savings

The 2023 contribution limit for traditional IRA’s and Roth IRA’s is $6,500 plus $1,000 as an additional catch-up contribution for individuals ages 50 and up, subject to income limitations.

For Roth IRA’s, contribution phase out in 2023 is at adjusted gross income (AGI) of $218,000 to $228,000 for married filing jointly filers, $138,000 to $153,000 for single and head of household filers, and $0 to $10,000 for married filing separately filers.

The deduction phase out for traditional IRA’s is $116,000 to $136,000 for married filing jointly filers, $73,000 to $83,000 for single filers, and $0 to $10,000 for married filing separately filers. If only one spouse is covered by a plan, the phaseout for deducting a contribution for the uncovered spouse starts at $218,000 of AGI and ends at $224,000.

Required minimum distributions (RMD)

A required minimum distribution (RMD) is an IRS-mandated amount of money that you must withdraw from a tax-deferred retirement account which includes traditional IRA’s, rollover IRA’s, SIMPLE IRA’s, SEP IRA’s and most 401(k) and 403(b) plans or an employer sponsored retirement account each year, starting at age 73.

You must start taking RMDs when you turn 73 or continue to take RMDs if you reached the previous RMD age before 2023 (i.e. 70 ½ prior to January 1, 2020, or 72, prior to January 1, 2023). There is one exception: people still working after age 73 usually may delay taking RMDs from their employer sponsored plan until they retire.

You can delay taking your first RMD until April 1^st of the year after you turn the RMD age. For example, if your 73^rd birthday is in 2024, you must take your first RMD out of your retirement account(s) by April 1, 2025. This exception only applies to an employer sponsored retirement plan, NOT IRAs and does not apply to business owners with more than 5% of an ownership interest.

Any retirement distribution made by an individual before he or she is 59 ½ years old may be subject to a 10% penalty on the distribution unless the following exceptions apply:

1. Death of the retirement account owner
2. Disability of the retirement account owner
3. The retirement account owner is an active-duty member of the US Armed Forces.
4. The retirement account owner rolls his or her monies over to a separate retirement plan or IRA within 60 days.

Inherited IRA’s by a non-spouse

Non-spouse beneficiaries who inherit IRA assets after January 1, 2020 are required to withdraw the full balance of the IRA account within 10 years of the original account owner’s death.  The beneficiary of the inherited IRA would need to continue RMD’s if the deceased owner had already reached the required beginning date of their RMD, with total account being depleted within 10 years.

Inherited Roth IRA’s

Under the SECURE Act rules, most non-spouse beneficiaries must deplete an inherited Roth IRA within 10 years of the original owner’s death, if the death occurred in 2020 or later. If you inherit a Roth IRA from a spouse, you can treat the account as your own or stretch distributions over your lifetime.

Energy efficient home improvement credit

For 2023, a $3,200 annual tax credit limit will replace the old $500 lifetime limit. The nonrefundable credit equals 30% of the costs of all eligible home improvements made during the year. Eligible home improvements include home energy audits, residential energy property expenses, and qualified energy efficiency improvements installed during the year. Aside from the above in terms of the 30% credit limit and annual limit, there are specific limits per year on components such as windows ($600 per year) and exterior doors ($250 per door and $500 for all doors). $2,000 of the total $3,200 maximum credit must be applied toward qualified heat pumps, biomass stoves, and biomass boilers. Taxpayers can claim up to $3,200 each year they make eligible home improvements until 2033.

Clean vehicle credit

Individuals may be eligible for a credit upon the purchase of an electric vehicle in the 2023 tax year. A motor vehicle is defined as a vehicle that is used on public streets, roads, highways and has at least four wheels. Off road vehicles such as golf carts do not qualify for the credit.

Highlights of the credit:

• All electric, or clean, vehicles purchased after January 1^st are subject to the clean vehicle credit rules. The maximum amount of clean vehicle credit a taxpayer can qualify for is $7,500. The amount of the credit is subject to restrictions related to the vehicle battery components and the critical minerals requirement.
• Clean vehicles purchased by the taxpayer must be new vehicles placed into service on or after January 1^st, 2023.
• Taxpayers are eligible for the clean vehicle credit if their modified adjusted gross income does not exceed $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (all other filing statuses) in 2023.
• The credit is disallowed for vans, sport utility vehicles (SUVs), and pickup trucks with a manufacturer’s suggested retail price (MSRP) greater than $80,000 and all other vehicles with an MSRP greater than $55,000.
• Taxpayers can only claim the clean vehicle credit for one vehicle each year.
• A taxpayer that purchased a used clean vehicle in 2023 is eligible for the clean vehicle credit.  The credit for used clean vehicles is limited to $4,000. For the taxpayer to use this credit, their modified adjusted gross income cannot exceed $150,000 (married filing joint), $112,500 (head of household), and $75,000 (all other filing statuses). Used clean vehicles that are eligible for the credit must have a model year at least two years preceding its year of sale to the taxpayer and cannot have a sale price greater than $25,000.

Cryptocurrency

Sales of cryptocurrencies and the resulting capital gain(s) or loss(es) must be reported on Schedule D of an individual’s personal tax return. Wash sale rules do not apply to cryptocurrency. An individual can choose to sell his or her cryptocurrency, recognize the capital loss from the sale, and then buy the same cryptocurrency within a few days of the sale. If an individual is paid with cryptocurrency, he or she must report the value of the cryptocurrency as wage income in the current year. If an independent contractor is paid with cryptocurrency, his or her income must be reported on Schedule C.

Gambling winnings/losses

Any individual who wins money from gambling activities must report his or her fully taxable income on his or her tax return. The fair market value of prizes (i.e. cars, vacations, consumer goods) must also be reported as income in addition to cash winnings. Gambling losses can only be reported on an individual’s return if he or she itemizes deductions and are limited to the amount of gambling winnings. A taxpayer who takes the standard deduction on his or her return can’t net gambling losses with gambling winnings.

These are just some planning ideas to consider for 2023 and 2024 and are general in nature.  If you have any questions or need further information, please contact your TBC advisor.