Planning Opportunities to Consider Before Year-End Part 5 – Some Additional Considerations

We’ve covered some year-end planning opportunities over the past four weeks such as Required Minimum Distributions, Capital Gain Distributions, Roth Conversions and Charitable Contributions.

All of the above actions for tax-year 2023, including maximizing workplace 401(k) contributions, must be made before Jan. 1, 2024, but there are some planning exceptions.  For example, maximizing deductible contributions to traditional IRAs and Health Savings Accounts for 2023 can often be made until April 15, 2024, next year’s tax deadline. Non-deductible Roth IRA contributions for 2023 can also be made up until April 15, 2024.

Here are some additional areas to focus on now:

Check withholding and estimated taxes 

Inflation has pushed the penalty on tax underpayments to 8%.  Please check your withholding or quarterly estimated taxes, especially if your income has been uneven or included a windfall. This penalty can be easily avoided with proactive tax planning.

Most filers must pay 90% of their taxes from the previous year long before the April tax deadline to avoid the penalty. The due date is Dec. 31, 2023 for employees and Jan. 16, 2024 for those making fourth-quarter 2023 estimated payments.

Employees who raise their paycheck withholding late in the year often escape underpayment penalties for the entire year, and the IRS has posted a calculator to help figure withholding. Retirees and self-employed taxpayers must do their own assessments. What if you’re headed for a big 2023 refund? Given IRS backlogs and snafus, consider lowering withholding or estimated tax payments to minimize headaches if the refund is delayed.

Should I take the standard deduction or itemize?

Assess your overall deductions. Filers can reduce taxable income by subtracting one overall amount called the standard deduction from their adjusted gross income, or by detailing “itemized” deductions for mortgage interest, state and local taxes, charitable donations, medical expenses and others.

Since the “Tax Cuts and Jobs Act” capped the available deduction for state and local/property taxes at $10,000, most taxpayers now use the standard deduction. For 2023, the standard deduction is $27,700 for married joint filers, $13,850 for single filers and $20,800 for heads of household.  The additional Standard deduction for filer’s age 65 or older is $1,850 filing singly and $1,500 each filing jointly for 2023.

Taxpayers taking the standard deduction for 2023 or 2024 should evaluate whether it makes sense to “bunch” deductions to benefit from itemizing in some years.  Often the best candidates for bunching are charitable donations. This move is harder for medical expenses, as many filers don’t have expenses greater than the 7.5% income threshold. For those who do, the service must be completed in the year of the deduction.

Make a game plan for inherited IRAs  

This year, the IRS issued rules detailing required annual withdrawals from inherited IRAs.  These new rules only affect IRAs inherited in 2020 or later. The upshot: Heirs of traditional IRAs whose owners hadn’t begun required withdrawals by death and heirs of Roth IRAs have 10 years to completely withdraw the accounts. Exceptions to the 10-year rule apply for heirs who are spouses, minor children (not grandchildren) of the IRA owner, and certain others.

Heirs of traditional IRAs whose original owners had already been taking required minimum distributions also have 10 years to empty the accounts, with similar exceptions, but also must take minimum distributions based on their own life expectancy for years one through nine.  This requirement may make proactive tax planning helpful so that you don’t end up waiting and incurring a huge tax bill in year 10.  Everyone’s situation is different so speak with your ACM Wealth advisor if you’ve inherited an IRA after 2020.

Update & Delay -Doing gig work or selling online? Get ready for new IRS re

Starting in tax year 2024, not 2023, many more gig workers and sellers who use platforms like eBay, Airbnb, Venmo and Uber will have earnings reported to the IRS on 1099-K forms than in the past. The threshold for platforms and other payers to notify the IRS of payments is now $600, compared with at least $20,000 before the law changed. Many more payees will need to prove, if audited, why their sales of used clothes on eBay and Etsy aren’t taxable. Gig workers and platform sellers should start preparing now for next year’s tax season by establishing a process to maintain their records.

It’s been five weeks of year-end planning information and for some folks it may be similar to drinking water through a fire hose. As always, if you have any questions or are unsure if an above or previous item applies to your specific situation, please do not hesitate to reach out to your ACM Advisor.

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