2023 YEAR-END TAX PLANNING FOR INDIVIDUALS
With rising interest rates, inflation and continuing market volatility, tax
planning is as essential as ever for taxpayers looking to manage cash flow
while paying the least amount of taxes possible over time. As we approach
year end, now is the time for individuals, business owners and family
offices to review their 2023 and 2024 tax situations and identify
opportunities for reducing, deferring or accelerating their tax obligations.
The information contained within this article is based on
federal laws and policies in effect as of the publication date. This
article discusses tax planning for federal taxes. Applicable state and
foreign taxes should also be considered. Taxpayers should consult with a
trusted advisor when making tax and financial decisions regarding any of
the items below.
Individual Tax Planning Highlights
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
|
2024 Federal Income Tax Rate Brackets
|
Tax Rate
|
Joint/Surviving
Spouse
|
Single
|
Head of Household
|
Married Filing
Separately
|
Estates & Trusts
|
|
10%
|
$0 – $23,200
|
$0 – $11,600
|
$0 – $16,550
|
$0 – $11,600
|
$0 – $3,100
|
|
12%
|
$23,201 –
$94,300
|
$11,601 –
$47,150
|
$16,551 – 63,100
|
$11,601 –
$47,150
|
-
|
|
22%
|
$94,301 –
$201,050
|
$47,151 – $100,525
|
$63,101 – $100,500
|
$47,151 –
$100,525
|
-
|
|
24%
|
$201,051 –
$383,900
|
$100,526 – $191,950
|
$100,501 – $191,950
|
$100,526 –
$191,950
|
$3,101 – $11,150
|
|
32%
|
$383,901 –
$487,450
|
$191,951 – $243,725
|
$191,951 – $243,700
|
$191,951 –
$243,725
|
-
|
|
35%
|
$487,451 –
$731,200
|
$243,726 – $609,350
|
$243,701 – $609,350
|
$243,726 –
$365,600
|
$11,151 – $15,200
|
|
37%
|
Over $731,200
|
Over $609,350
|
Over $609,350
|
Over $365,600
|
Over $15,200
|
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. If the marginal tax rate is the same in both years, deferring
income from 2023 to 2024 will produce a one-year tax deferral, and
accelerating deductions from 2024 to 2023 will lower the 2023 income tax
liability.
Actions to consider that may result in a reduction or deferral of taxes
include:
Delaying closing capital gain transactions until after year end or
structuring 2023 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. 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 and 2024 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
|
2024 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 – $94,050
|
$0 – $47,025
|
$0 – $63,000
|
$0 – $47,025
|
$0 – $3,150
|
|
15%
|
$94,051 – $583,750
|
$47,026 – $518,900
|
$63,001 – $551,350
|
$47,026 – $291,850
|
$3,151 – $15,450
|
|
20%
|
Over $583,750
|
Over $518,900
|
Over $551,350
|
Over $291,850
|
Over $15,450
|
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 (also see Charitable Contributions, below).
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.
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 and $168,600 for
2024. 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.
Long-Term Care Insurance and Services
Premiums an individual pays on a qualified long-term care insurance policy
are deductible as a medical expense. The maximum deduction amount is
determined by an individual’s age. The following table sets forth the
deductible limits for 2023 and the estimated deductible limits for 2024 (the
limitations are per person, not per return):
|
Age
|
Deduction
Limitation 2023
|
Deduction
Limitation 2024
|
|
40 or under
|
$480
|
$470
|
|
Over 40 but not over 50
|
$890
|
$880
|
|
Over 50 but not over 60
|
$1,790
|
$1,760
|
|
Over 60 but not over 70
|
$4,770
|
$4,710
|
|
Over 70
|
$5,960
|
$5,880
|
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.
- The SECURE Act permits a penalty-free withdrawal of up to $5,000 from
traditional IRAs and qualified retirement plans for qualifying expenses
related to the birth or adoption of a child after December 31, 2019. The
$5,000 distribution limit is per individual, so a married couple could
each receive $5,000.
- Under the SECURE Act, 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 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.
- Small businesses can contribute the lesser of (i) 25% of employees’
salaries or (ii) an annual maximum set by the IRS each year to a
Simplified Employee Pension (SEP) plan by the extended due date of the
employer’s federal income tax return for the year that the contribution
is made. The maximum SEP contribution for 2023 is $66,000. The maximum
SEP contribution for 2024 is $69,000. The calculation of the 25% limit
for self-employed individuals is based on net self-employment income,
which is calculated after the reduction in income from the SEP
contribution (as well as for other things, such as self-employment
taxes).
Foreign Earned Income Exclusion
The foreign earned income exclusion is $120,000 in 2023 and increases to
$126,500 in 2024.
Alternative Minimum Tax
A taxpayer must pay either the regular income tax or the alternative minimum
tax (AMT), whichever is higher. The established AMT exemption amounts for
2023 are $81,300 for unmarried individuals and individuals claiming head of
household status, $126,500 for married individuals filing jointly and
surviving spouses, $63,250 for married individuals filing separately and
$28,400 for estates and trusts. The AMT exemption amounts for 2024 are
$85,700 for unmarried individuals and individuals claiming head of household
status, $133,300 for married individuals filing jointly and surviving
spouses, $66,650 for married individuals filing separately and $29,900 for
estates and trusts.
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.
Limitation on Deductions of State and Local Taxes (SALT Limitation)
For individual taxpayers who itemize their deductions, the Tax Cuts and Jobs
Act introduced a $10,000 limit on deductions of state and local taxes paid
during the year ($5,000 for married individuals filing separately). The
limitation applies to taxable years beginning on or after December 31, 2017,
and before January 1, 2026. Various states have enacted new rules that allow
owners of pass-through entities to avoid the SALT deduction limitation in
certain cases.
Charitable Contributions
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 cash contributions continue to be 30% of AGI
for contributions to non-operating private foundations. 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.
Estate and Gift Taxes
For gifts made in 2023, the gift tax annual exclusion is $17,000 and for
2024 is $18,000. 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. However, for 2023 and 2024,
only the first $175,000 and $185,000, respectively, of gifts to a non-U.S.
citizen spouse is excluded from the total amount of taxable gifts for the
year. Tax planning strategies may include:
Making annual exclusion gifts.
- Making larger gifts to the next generation, either outright or in
trust.
- Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained
Annuity Trust (GRAT) or selling assets to an Intentionally Defective
Grantor Trust (IDGT).
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. The limitation is $305,000 ($610,000
for joint filers) for 2024. 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.
