2023 Individual Planning Guide

December 7, 2023

Tax planning for yourself and your household can ensure a smooth transition from 2023 to 2024. Now is the time to review your taxes and identify opportunities for reducing, deferring or accelerating your tax obligations. Here are some tips to get you started.

 

As a reminder, WellsColeman will no longer send certified payments on behalf of our clients due to the disruption experienced with the US Postal Service and the related delivery timing challenges. Rather, we are available to assist you with creating online tax payment accounts as necessary. We included instructions on how to make a payment with or without an account on our website.

 

2023 Federal Income Tax Rate Brackets

Tax Rate

Joint/Surviving Spouse

Single

Head of Household

 Married Filing Separately

Estates & Trusts
10%

$0 – $22,000

 $0 – $11,000 $0 – $15,700 $0 – $11,000 $0 – $2,900
12% $22,001 –
$89,450		 $11,001 –
$44,725		 $15,701 –
$59,850		 $11,001 –
$44,725		 –
22% $89,451 –
$190,750		 $44,726 –
$95,375		 $59,851 –
$95,350		 $44,726 –
$95,375		 –
24% $190,751 –
$364,200		 $95,376 – $182,100 $95,351 – $182,100 $95,376 –
$182,100		 $2,901 –
$10,550
32% $364,201 –
$462,500		 $182,101 – $231,250 $182,101 – $231,250 $182,101 –
$231,250		 –
35% $462,501 –
$693,750		 $231,251 – $578,125 $231,251 – $578,100 $231,251 –
$346,875		 $10,551 – $14,450
37% Over $693,750 Over $578,125 Over $578,100 Over $346,875 Over $14,450

 

Timing of Income and Deductions

Taxpayers should consider whether they can minimize their tax bills by shifting income or deductions between 2023 and 2024. Ideally, income should be received in the year with the lower marginal tax rate, and deductible expenses should be paid in the year with the higher marginal tax rate.

Actions to consider that may result in a reduction or deferral of taxes from 2023 to 2024 include:

  • Delaying closing capital gain transactions until after year end or structuring 2024 transactions as installment sales so that gain is deferred past 2023 (also see Long Term Capital Gains, below).
  • Considering whether to trigger capital losses before the end of 2023 to offset 2023 capital gains.
  • Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
  • Deferring commission income by closing sales in early 2024 instead of late 2023.
  • Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2023 (subject to AGI limitations).
  • Evaluating whether non-business bad debts are worthless by the end of 2023 and should be recognized as a short-term capital loss.
  • Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years.

On the other hand, taxpayers that will be in a higher tax bracket in 2024 may want to consider potential ways to move taxable income from 2024 into 2023, such that the taxable income is taxed at a lower tax rate. In these cases, current year actions to consider that could reduce 2024 taxes include:

  • Accelerating capital gains into 2023 or deferring capital losses until 2024.
  • Electing out of the installment sale method for 2023 installment sales.
  • Deferring deductions such as large charitable contributions to 2024.

 

Long-Term Capital Gains

The long-term capital gains rates for 2023 are shown below. The tax brackets refer to the taxpayer’s taxable income. Capital gains also may be subject to the 3.8% Net Investment Income Tax.

2023 Long-Term Capital Gains Rate Brackets

Long-Term Capital Gains Tax Rate

Joint/Surviving Spouse

Single

 Head of Household

Married Filing Separately

 Estates & Trusts
0%

$0 – $89,250

$0 – $44,625

$0 – $59,750

 $0 – $44,625 $0 – $3,000
15% $89,251 – $553,850

$44,626 – $492,300

 $59,751 – $523,050 $44,626 – $276,900 $3,001 – $14,650
20%

Over $553,850

Over $492,300

Over $523,050

 Over $276,900 Over $14,650

 

Long-term capital gains (and qualified dividends) are subject to a lower tax rate than other types of income. Investors should consider the following when planning for capital gains:

  • Holding capital assets for more than a year (more than three years for assets attributable to carried interests) so that the gain upon disposition qualifies for the lower long-term capital gains rate.
  • Considering long-term deferral strategies for capital gains such as reinvesting capital gains into designated qualified opportunity zones.
  • Investing in, and holding, “qualified small business stock” for at least five years.
  • Donating appreciated property to a qualified charity to avoid long term capital gains tax.

 

Net Investment Income Tax

An additional 3.8% net investment income tax (NIIT) applies on net investment income above certain thresholds. Net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.

In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider deferring net investment income for the year.

The surtax is 3.8% of the lesser of:

  • Net investment income (NII), or
  • The excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for married filing joint or surviving spouse, $125,000 for married filing separate, and $200,000 in any other case).

 

Social Security Tax

The Old-Age, Survivors, and Disability Insurance (OASDI) program is funded by contributions from employees and employers through FICA tax. The FICA tax rate for both employees and employers is 6.2% of the employee’s gross pay, but only on wages up to $160,200 for 2023. Self-employed persons pay a similar tax, called SECA (or self-employment tax), based on 12.4% of the net income of their businesses.

 

Employers, employees, and self-employed persons also pay a tax for Medicare/Medicaid hospitalization insurance (HI), which is part of the FICA tax, but is not capped by the OASDI wage base. The HI payroll tax is 2.9%, which applies to earned income only. Self-employed persons pay the full amount, while employers and employees each pay 1.45%. An extra 0.9% Medicare (HI) payroll tax must be paid by individual taxpayers on earned income that is above certain adjusted gross income (AGI) thresholds, i.e., $200,000 for individuals, $250,000 for married couples filing jointly and $125,000 for married couples filing separately. However, employers do not pay this extra tax.

 

Retirement Plan Contributions

Individuals may want to maximize their annual contributions to qualified retirement plans and Individual Retirement Accounts (IRAs).

  • The maximum amount of elective contributions that an employee can make in 2023 to a 401(k) or 403(b) plan is $22,500 ($30,000 if age 50 or over and the plan allows “catch up” contributions). For 2024, these limits are $23,000 and $30,500, respectively.

 

  • Individuals are now able to contribute to their traditional IRAs in or after the year in which they turn 70½.

 

  • Beginning in 2023, the SECURE Act 2.0 raised the age that a taxpayer must begin taking required minimum distributions (RMDs) to age 73. If the individual reaches age 72 in 2023, the required beginning date for the first RMD is April 1, 2025, for 2024. If the taxpayer reaches age 73 in 2023, the taxpayer was 72 in 2022 and subject to the age 72 RMD rule in effect for 2022. If the taxpayer reached age 72 in 2022, the first RMD was due April 1, 2023, and the second RMD is due December 31, 2023.

 

  • Individuals age 70½ or older can donate up to $100,000 to a qualified charity directly from a taxable IRA. The amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040.

 

  • The SECURE Act generally requires that designated beneficiaries of persons who died after December 31, 2019, take inherited plan benefits over a 10-year period. Eligible designated beneficiaries (i.e., surviving spouses, minor children of the plan participant, disabled and chronically ill beneficiaries and beneficiaries who are less than 10 years younger than the plan participant) are not limited to the 10-year payout rule. Special rules apply to certain trusts.

 

  • Under proposed Treasury Regulations (issued February 2022) that address required minimum distributions from inherited retirement plans of persons who died after December 31, 2019, and after their required beginning date, designated and non-designated beneficiaries will be required to take annual distributions, whether subject to a ten-year period or otherwise.

 

  • If eligible to do so, consider converting traditional-IRA money into a Roth IRA.
    • Keep in mind, however, that such a conversion will increase your AGI for 2023.

 

Itemized Deductions

Many taxpayers will not be able to itemize because of the high basic standard deduction amounts that apply for 2023 (single and married filing separately $13,850, married filing jointly $27,700, head of household $20,800). Additionally, many itemized deductions have been reduced or abolished.

  • No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (i.e., tax preparation fees and unreimbursed employee expenses) are not deductible.
  • Medical expenses may be itemized if they exceed 7.5% of your adjusted gross income.
  • Payments of the above items will not save taxes if they do not cumulatively exceed the standard deduction for your filing status.
  • Cash contributions made to qualifying charitable organizations, including donor advised funds, in 2023 and 2024 will be subject to a 60% AGI limitation. The limitations for noncash contributions continue to be 30% of AGI. Tax planning around charitable contributions may include:
    • Creating and funding a private foundation, donor advised fund or charitable remainder trust.
    • Donating appreciated property to a qualified charity to avoid long term capital gains tax.

 

Kiddie Tax

The unearned income of a child is taxed at the parents’ tax rates if those rates are higher than the child’s tax rate.

 

Estate and Gift Taxes

The gift tax annual exclusion is $17,000 for 2023 and is $18,000 for 2024. For 2023, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,920,000 per person. For 2024, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $13,610,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax.

Tax planning strategies may include:

  • Making annual exclusion gifts.
  • Making larger gifts to the next generation, either outright or in trust.

 

Net Operating Losses and Excess Business Loss Limitation

Net operating losses (NOLs) generated in 2023 are limited to 80% of taxable income and are not permitted to be carried back. Any unused NOLs are carried forward subject to the 80% of taxable income limitation in carryforward years.

A non-corporate taxpayer may deduct net business losses of up to $289,000 ($578,000 for joint filers) in 2023. A disallowed excess business loss (EBL) is treated as an NOL carryforward in the subsequent year, subject to the NOL rules. With the passage of the Inflation Reduction Act, the EBL limitation has been extended through the end of 2028.

 

Foreign Bank Account Reporting

The IRS has become increasingly aggressive at tracking down individuals who have not reported foreign bank accounts. If you have an interest in a foreign bank account, it must be disclosed. Failure to do so carries stiff penalties.

You must file a Report of Foreign Bank and Financial Accounts (FBAR) if:

  • You are a U.S. resident or a person doing business in the United States;
  • You had one or more financial account that exceeded $10,000 during the calendar year;
  • The financial account was in a foreign country; and
  • You had a financial interest in the account or signatory or other authority over the foreign financial account.

 

These are just some of the year-end tax planning strategies that could potentially benefit you.  Please contact us if you have questions, want more information, or would like us to assist with year-end planning.

 

Sincerely,

5004 Monument Ave

Richmond, VA 23230

T: 804.249.3328

www.wellscoleman.com

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