The Trump presidency alongside a Republican led House and Senate will likely make permanent many of the provisions listed in the TCJA. Planning techniques previously considered as a result of the anticipated TCJA sunset are likely to be adjusted according to individual circumstances.
What Happens if the Sunset Doesn't Sunset?
With the second half of 2024 on the horizon, it is important to be aware of the impending changes that will ensue in the tax and estate planning world at the end of next year and will become effective (as of this writing) January 1, 2026. We will highlight what will be changing, why it is important, and strategies to consider in preparation of this expiration.
Tax Cuts and Jobs Act Expiration
It is crucial to engage in strategic tax planning, particularly considering the upcoming changes to the standard deduction and tax brackets for the year 2024. These modifications, affecting filers who do not itemize their deductions, will only be reflected in the tax returns filed in early 2025.
The Internal Revenue Service has elevated the thresholds for its seven tax brackets by 5.4% in 2024. This adjustment implies that a single person can now earn up to $609,350 before facing taxation at the highest rate of 37%. Understanding and leveraging these changes can significantly impact one’s tax liability.
The Reasons for Adjustments
In the context of the broader economic landscape, the Federal Reserve’s efforts to mitigate inflation have influenced recent adjustments in the consumer price index, which is intricately linked to tax changes. Despite some success in curbing inflation, the index continues to rise, albeit at a slower pace.
Moreover, the IRS routinely adjusts various figures in the tax code to account for inflation. For instance, the maximum Earned Income Credit for low-income workers with children has increased to $7,830, marking a $400 raise. Additionally, workers now have the opportunity to contribute more funds to health savings accounts, with the limit set at $3,200.
Estate planning considerations are also paramount, given the rise in the estate tax threshold. Estates valued under $13.61 million are now exempt from taxes, up from $12.92 million in 2023. Similarly, the gift tax threshold has increased to $18,000, allowing for larger tax-free gifts.
Deduction Increases
Tax Rates
For the 2024 tax year, the top tax rate remains 37% for individual single taxpayers with incomes greater than $609,350 ($731,200 for married couples filing jointly).
The other marginal tax rates are:
Additional Changes
Beneficial Ownership Information Required Reporting
In 2021, Congress enacted the Corporate Transparency Act, which includes a beneficial ownership information (BOI) reporting requirement. BOI reporting requirements intend to help U.S. law enforcement fight money laundering and other illegal activity.
Beginning January 1, 2024, businesses outside of sole proprietors will be required to complete BOI reporting. Companies that may be a “reporting company” and will be required to report information to the Financial Crimes Enforcement Network (FinCEN) include:
Entities that are exempt from the BOI reporting requirements include publicly traded companies, nonprofits, and “large operating companies”. Large operating companies include those with more than 20 fulltime employees in the U.S., reported gross receipts or sales of over $5mm on the prior year’s tax return, and an operating presence at a physical office in the U.S.
A “beneficial owner” is an individual who either owns or controls a minimum of 25% of the ownership interests of a reporting company or exercises “substantial control” over a reporting company. A person may be considered as exercising substantial control if they serve as a senior officer, have authority over any senior officers, or have significant influence over important decisions made by the reporting company.
Reporting companies will report beneficial ownership information electronically via FinCEN’s website. Additional information on BOI reporting can also be found here: www.fincen.gov/boi.
In light of these changes, your Wellspring advisor will help navigate the complexities of the evolving tax landscape by identifying opportunities for tax savings and ensuring financial strategies align with the current regulatory environment. This proactive approach to tax planning is essential to help optimize financial outcomes and minimize tax burdens.
As always, please do not hesitate to contact us with any questions regarding how these changes may impact you.
Copyright © 2023. All rights reserved. Distributed by Financial Media Exchange
Additional Contributions: A’Shira Nelson, CPA, Tax Manager, Director, Wellspring Financial Advisors, LLC
Information as of December 28, 2023
Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.
As we approach the end of 2023, it is the perfect time to review financial objectives to ensure they are aligned with current and future financial commitments. While there hasn’t been significant tax legislation in 2023, several critical provisions from 2022 will influence the upcoming tax year.
Year-End Tax PlanningThe nation’s 2023 tax season began on January 23rd and the IRS has indicated they have taken additional steps to improve service for taxpayers. As part of the Inflation Reduction Act, more than 5,000 new customer service staff were hired to help improve service this filing season.
The filing deadline to submit 2022 tax returns or an extension to file and pay tax owed is April 18th for most taxpayers. Taxpayers requesting an extension will have until October 16th to file their returns.
What’s New for 2022 Tax Returns?
Some pertinent changes that took effect in 2022 that may impact your tax return include:
2022 standard mileage rate for business, charitable, and medical travel – The 2022 rate for business use of a vehicle is 58.5 cents per mile from January 1, 2022, to June 30, 2022, and 62.5 cents per mile from July 1, 2022, to December 31, 2022. The 2022 rate for use of your vehicle for volunteer work for certain charitable organizations is 14 cents per mile from January 1, 2022, to December 31, 2022. The 2022 rate for operating expenses for a car when you use it for medical reasons is 18 cents per mile from January 1, 2022, to June 30, 2022, and 22 cents per mile from July 1, 2022, to December 31, 2022.
The Secure Act 2.0 changed the required minimum distribution (RMD) age to 73 – Taxpayers born in 1951 are not required to take RMDs until 2024.
Electric vehicle (EV) tax credit – Taxpayers who purchased and took possession of a qualified EV in 2022 are eligible for a clean vehicle tax credit up to $7,500. There are price and use limits, however, there are no AGI requirements for EVs purchased before 2023.
Covid-related Changes
The Child Tax Credit (CTC) – The many changes to the CTC implemented by the American Rescue Plan Act were not extended. For 2022, (1) the credit amount is $2,000 for each qualifying child; (2) the amount of the CTC that can be claimed as a refundable credit is limited as it was in 2020 except that the maximum refundable child tax credit amount has increased to $1,500 for each qualifying child; (3) a child must be under age 17 at the end of 2022 to be a qualifying child.
The Earned Income Credit (EIC) – The enhancements for taxpayers without a qualifying child implemented by the American Rescue Plan Act don’t apply in 2022. This means that to claim the EIC without a qualifying child in 2022, you must be at least age 25 but under age 65 at the end of 2022. If you are married filing a joint return, either you or your spouse must be at least age 25 but under age 65 at the end of 2022. It doesn’t matter which spouse meets the age requirement.
The Child and Dependent Care Tax Credit – The changes to the credit for child and dependent care expenses implemented by the American Rescue Plan Act of 2021 were not extended. Thus, for 2022, the credit for child and dependent care expenses is nonrefundable. The dollar limit on qualifying expenses is $3,000 for one qualifying person and $6,000 for two or more qualifying persons. The maximum credit amount allowed is 35% of your employment-related expenses if your AGI is $15,000 or less. The maximum amount allowed is reduced (phased down) as your AGI increases above $15,000.
Certain health-related credits are no longer available – The credit for sick and family leave for certain self-employed individuals was not extended, so you can no longer claim these credits. In addition, the health coverage tax credit was not extended and thus is not available after 2021.
Changes to 1099-K reporting – The American Rescue Plan Act of 2021, which was signed into law in March 2021, significantly reduces the reporting threshold associated with Form 1099-K, “Payment Card and Third-Party Network Transactions” from $20,000 in aggregate payments and 200 transactions to a threshold of $600 in aggregate payments, with no minimum transaction requirement. Note: The $600 reporting requirement is expected to apply for transactions during 2023, so you should plan on working with the $600 rule when you file your 2023 tax return.
2023 Tax Planning
The Employee Retention Tax Credit (ERTC) – The ERTC deadline is March 12th, 2023. Businesses have three years after the program ends to look back at wages paid from March 12, 2020 to October 1, 2021, to determine eligibility. The Infrastructure Investment and Jobs Act notes an exception for wages paid by a recovery startup business— the original deadline of January 1, 2022, remains in place for those businesses.
Bonus depreciation will start to phase out in 2023 – For most large capital equipment purchases and assets, 2022 is the last year to receive that 100% bonus. It is going to phase down to 80% in 2023, and then reduced by 20% every year until finally, after 2026, it’s completely phased out.
The Inflation Reduction Act extended the $7,500 EV tax credit for 10 years (through December 31, 2032) – This credit is taken in the year of delivery of the EV. AGI now applies to EVs purchased in 2023 (or after) and may not exceed $300,000 for married couples filing jointly, $225,000 for heads of households, and $150,000 for all other filers.
The allowance of full deduction for business meals provided by a restaurant expired at the end of 2022 – In 2023, all business-related restaurant meals will revert to the rate of 50% deductible.
These are just a few of the important tax law updates for 2022 and 2023. As always, please do not hesitate to contact us with any questions regarding how these changes may impact you.
Author: A’Shira Nelson, CPA, Tax Manager, Director, Wellspring Financial Advisors, LLC
Information as of March 8, 2023
Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.
