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Personal Tax Planning Letter lanning Letter As we approach the end of 2023, it’s me to gear up for the upcoming tax season and consider some essenal year-end tax planning. Like every year, there are a few updates to the tax rules. DMJPS is here to assist you. We have compiled key points and ps as a high level overview. The informaon provided is intenonally general. Keep in mind, everyone's tax situaon varies. What suits one person may not be the best t for another. Our goal is to tailor our advice to your unique situaon. DMJPS is dedicated to personalized service that exceeds our clients’ expectations. As a U.S. Top 200 accounting firm, our team of more than 165 professionals proudly serve clients locally, regionally, and internationally. With North Carolina offices from the mountains to the coast in Greensboro, Asheville, Boone, Durham, Marion, Sanford, and Wilmington, DMJPS provides solutions from one reliable firm. DMJPS is prepared to assist you with your tax reporng maers across the naon and beyond. As a member of CPAmerica, Inc. and Crowe Global, DMJPS has access to a network of more than 200 independent accounng and advisory services rms in more than 120 countries. DMJPS is commied to providing our clients the personal aenon, loyalty, and genuine concern that they expect and deserve from a local rm, while oering extensive services and worldwide connecons comparable to some of the largest naonal rms. DMJPS CPAs + Advisors is commied to providing a level of knowledge, experience, and resources designed to help every client Be Greater. GREENSBORO | ASHEVILLE | BOONE | DURHAM | MARION | SANFORD | WILMINGTON 888.873.2545 | connect@dmjps.com | dmjps.com
3 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. TABLE OF CONTENTS The topics below are clickable links for easy navigaon. TAX LAW UPDATES ..................................................................................................................................................................................................... 4 INCOME ..................................................................................................................................................................................................................... 6 ORDINARY TAX RATES........................................................................................................................................................................................... 6 CAPITAL GAINS & LOSSES ..................................................................................................................................................................................... 7 NET INVESTMENT INCOME TAX (NIIT) .................................................................................................................................................................. 9 PASSIVE INCOME & PASSIVE LOSSES .................................................................................................................................................................. 10 CRYPTOCURRENCY ............................................................................................................................................................................................. 12 ALTERNATIVE MINIMUM TAX (AMT) .................................................................................................................................................................. 13 DEDUCTIONS & CREDITS ......................................................................................................................................................................................... 14 STANDARD DEDUCTION ..................................................................................................................................................................................... 14 ITEMIZED DEDUCTIONS ..................................................................................................................................................................................... 15 CHARITABLE GIVING ........................................................................................................................................................................................... 15 CHILD TAX CREDIT (CTC) ..................................................................................................................................................................................... 16 RETIREMENT............................................................................................................................................................................................................ 17 TRADITIONAL & ROTH IRAS ................................................................................................................................................................................ 17 SIMPLE IRA ......................................................................................................................................................................................................... 18 SEP IRA ............................................................................................................................................................................................................... 19 401(k) ................................................................................................................................................................................................................. 20 403(b) ................................................................................................................................................................................................................ 21 REQUIRED MINIMUM DISTRIBUTIONS (RMDS) .................................................................................................................................................. 21 SOCIAL SECURITY ............................................................................................................................................................................................... 23 DEPENDENTS & EDUCATION.................................................................................................................................................................................... 23 STUDENT LOAN INTEREST .................................................................................................................................................................................. 23 KIDDIE TAX ......................................................................................................................................................................................................... 24 EMPLOYING FAMILY MEMBERS .......................................................................................................................................................................... 25 EDUCATION ........................................................................................................................................................................................................ 26 MEDICAL.................................................................................................................................................................................................................. 28 HEALTH SAVINGS ACCOUNT ............................................................................................................................................................................... 28 FLEXIBLE SPENDING ACCOUNT .......................................................................................................................................................................... 28 LONG-TERM CARE INSURANCE .......................................................................................................................................................................... 29 GIFTS & ESTATES ...................................................................................................................................................................................................... 30 GIFT TAX EXCLUSION .......................................................................................................................................................................................... 30 ESTATES .............................................................................................................................................................................................................. 31 MISCELLANEOUS ..................................................................................................................................................................................................... 32 ONLINE IRS ACCOUNT ........................................................................................................................................................................................ 32 MAINTAINING TAX RECORDS .............................................................................................................................................................................. 32 AVOIDING SCAMS .............................................................................................................................................................................................. 33 IDENTITY PROTECTION PIN (IP PIN) .................................................................................................................................................................... 33 ADDITIONAL RESOURCES ................................................................................................................................................................................... 34 CLOSING COMMENTS .............................................................................................................................................................................................. 34
4 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. TAX LAW UPDATES SECURE ACT 2.0 The Consolidated Appropriaons Act of 2023 (HR 2617) has signicantly enhanced rerement savings plans through SECURE Act 2.0, building on the 2019 SECURE Act. Key Provisions: • Required Minimum Distribuons (RMDs): The age to begin taking RMDs increases from 72 to 73 in 2023, with a further increase to 75 planned in 2033. The penalty for missed RMDs decreases from 50% to 25%, with a reducon to 10% if corrected within two years. See the Required Minimum Distribuons secon for further discussion. • Automac Enrollment: Starng in 2025, new rerement plans must automacally enroll employees at 3%-10% of wages, though employees may opt out. New companies and those with 10 or fewer employees are exempt. • Automac Escalaon: New plans in 2025 must increment contribuons by 1% annually unl reaching at least 10% but not more than 15% of wages, with certain exempons. • Catch-Up Contribuons: In 2023, parcipants aged 50+ can add an extra $7,500 annually to their 401(k) and 403(b) plans, increasing to $10,000 for those 60-63 in 2025. Aer 2023, high earners must make these contribuons on a Roth basis. However, the IRS has postponed the mandatory Roth catch-up for high earners aged 50+ from 2024 to 2026 due to implementaon challenges, resulng in a two-year delay. Other important provisions include the opon for Roth treatment of employer contribuons, expanded eligibility for long-term part-me employees, recognion of student loan payments as rerement contribuons for matching purposes, and the establishment of emergency savings accounts linked to rerement plans. Addionally, the Act allows penalty-free withdrawals for emergency expenses, introduces a federal matching contribuon for lower-income employees in 2027, permits nancial incenves for plan parcipaon, increases the tax credit for employers' start-up costs, and creates a "Rerement Savings Lost and Found" database. Finally, the Act expands the Employee Plans Compliance Resoluon System ("EPCRS") to enable more error correcons internally. BONUS DEPRECIATION For the 2023 tax year, businesses and their owners will experience changes in the ability to claim bonus depreciaon on new equipment and property. The Tax Cuts and Jobs Act of 2017 previously allowed taxpayers to deduct 100% of the purchase price of qualifying property. However, starng in 2023, bonus depreciaon will begin to phase out over the next four years:
5 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. 2023 80% Bonus Depreciaon Allowed 2024 60% Bonus Depreciaon Allowed 2025 40% Bonus Depreciaon Allowed 2026 20% Bonus Depreciaon Allowed By January 1, 2027, bonus depreciaon will be completely phased out unless new legislaon is passed. Despite this, businesses sll have the opportunity to fully depreciate qualifying property in the year of purchase by elecng Secon 179. For 2023, Secon 179 allows for immediate expensing of 100% of asset costs up to $1,160,000, with a threshold of $2,890,000 in total equipment purchases. However, it's important to note that Secon 179 cannot be used to create or increase a tax loss. DEDUCTIBLE MEALS In 2023, please be aware that the deducbility of expenses for food or beverages provided by a restaurant will revert back to 50%. This is a signicant change from the years 2021 and 2022, where these expenses were oen 100% deducble for amounts paid or incurred aer December 31, 2020, and before January 1, 2023. RESIDENTIAL CLEAN ENERGY CREDIT Invesng in renewable energy for your home such as solar panels, wind turbines, geothermal heat pumps, fuel cells, or baery storage technology can qualify you for the Residenal Clean Energy Credit. This credit equals 30% of the costs of new, qualied clean energy property installed from 2022 through 2032, with a phase-down in percentage for property installed in 2033 and 2034. Key points to note: • The credit is nonrefundable, but any excess can be carried forward to future years. • There are no annual or lifeme dollar limits, except for fuel cell property which has a limit of $500 for each half kilowa of capacity. • You may claim the credit for improvements to your main home, whether owned or rented, but not for a second home or a home used solely for business purposes. • Qualied expenses include costs of new clean energy property and may include labor costs for installaon. • Rebates and incenves may need to be subtracted from qualied expenses. • Solar water heaters must be cered, geothermal heat pumps must meet Energy Star requirements, and baery storage technology must have a capacity of at least 3 kilowa hours to qualify. Jump to Table of Contents
6 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. CRYPTOCURRENCY STAKING In the recently issued Rev. Rul. 2023-14, the IRS provides claricaon on the tax treatment of cryptocurrency rewards received by cash-method taxpayers who parcipate in proof-of-stake blockchain validaon. According to the ruling, when a taxpayer stakes cryptocurrency and receives addional units as rewards for successful validaon, the value of these rewards must be included in the taxpayer's gross income. The crucial factor for determining the ming of this inclusion is when the taxpayer gains dominion and control over the rewards, i.e., when they can sell, exchange, or otherwise dispose of the addional cryptocurrency units. This ruling is consistent with the general tax principles applicable to property transacons and the treatment of cryptocurrency as property for Federal income tax purposes, as outlined in Noce 2014-21. The noce species that taxpayers who receive cryptocurrency as payment for goods or services, or who mine cryptocurrency, must include the fair market value of the cryptocurrency in their gross income in the taxable year they obtain dominion and control over it. The recent revenue ruling further cements the IRS's posion on the taxability of cryptocurrency transacons and the need for taxpayers to carefully track and report their cryptocurrency holdings and acvies. Failure to accurately report cryptocurrency transacons can result in signicant penales and interest, making it crucial for individuals and businesses engaging in these acvies to consult with DMJPS to ensure compliance with all relevant tax laws and regulaons. INCOME ORDINARY TAX RATES These rates and brackets, set forth by the IRS, help determine how much tax you owe based on your taxable income. Recognizing where you stand can provide clarity, enabling informed decisions that could inuence your tax liability and potenal savings. Taxable Income 2023 (Projected) 2024 Beginning of 12% Regular Tax Bracket Joint or Qualifying Surviving Spouse $22,000 $23,200 Single $11,000 $11,600 Head of Household $15,700 $16,550 Married Filing Separately $11,000 $11,600 Estates and Nongrantor Trusts N/A N/A Beginning of 22% Regular Tax Bracket Joint or Qualifying Surviving Spouse $89,450 $94,300 Single $44,725 $47,150
7 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Head of Household $59,850 $63,100 Married Filing Separately $44,725 $47,150 Estates and Nongrantor Trusts N/A N/A Beginning of 24% Regular Tax Bracket Joint or Qualifying Surviving Spouse $190,750 $201,050 Single $95,375 $100,525 Head of Household $95,350 $100,500 Married Filing Separately $95,375 $100,525 Estates and Nongrantor Trusts $2,900 $3,100 Beginning of 32% Regular Tax Bracket Joint or Qualifying Surviving Spouse $364,200 $383,900 Single $182,100 $191,950 Head of Household $182,100 $191,950 Married Filing Separately $182,100 $191,950 Estates and Nongrantor Trusts N/A N/A Beginning of 35% Regular Tax Bracket Joint or Qualifying Surviving Spouse $462,500 $487,450 Single $231,250 $243,725 Head of Household $231,250 $243,700 Married Filing Separately $231,250 $243,725 Estates and Nongrantor Trusts $10,550 $11,150 Beginning of 37% Regular Tax Bracket Joint or Qualifying Surviving Spouse $693,750 $731,200 Single $578,125 $609,350 Head of Household $578,100 $609,350 Married Filing Separately $346,875 $365,600 Estates and Nongrantor Trusts $14,450 $15,200 CAPITAL GAINS & LOSSES Capital gains (and losses) are either short or long-term depending on how long the capital asset was held before being sold or exchanged. Long-term treatment applies whenever the holding period is more than one year. For 2018–2025, adjusted net long-term capital gains rates are no longer ed to your ordinary income brackets. Taxable Income (Projected) 2023 2024 Beginning of 15% Regular Tax Bracket Joint or Qualifying Surviving Spouse $89,250 $94,050 Single $44,625 $47,025 Head of Household $59,750 $63,000 Married Filing Separately $44,625 $47,025 Estates and Nongrantor Trusts $3,000 $3,150 Jump to Table of Contents
8 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Beginning of 20% Regular Tax Bracket Joint or Qualifying Surviving Spouse $553,850 $583,750 Single $492,300 $518,900 Head of Household $523,050 $551,350 Married Filing Separately $276,900 $291,850 Estates and Nongrantor Trusts $14,650 $15,450 Planning Strategies and Consideraons • The 3.8% Net Investment Income Tax could also apply. See the Net Investment Income Tax (NIIT) secon. • It’s somemes more benecial recognizing a larger gain if that gain is taxed at the long-term, rather than short-term, capital gain rate. When you sell less than your enre holdings of a security (purchased at dierent mes and prices) at a gain, you should consider selling the shares that meet the long-term holding period requirement. While greater gain may be recognized (depending on the basis in the stock), it may be more than oset by the taxes saved by triggering a long-term gain. • Liquidang stock or mutual fund shares this year to produce a $3,000 loss that counters regular income can decrease your federal tax obligaon. This approach is especially benecial if you are currently in an elevated tax bracket because of unexpected gains, or if you expect to be in a lesser bracket in the upcoming years, perhaps due to rerement. If you (or your spouse, in the case of a joint ling) had taxable earnings within the year, the saved tax funds might be channeled into a tradional IRA (which could be tax-deducble) or a Roth IRA, helping defer or eliminate potenal taxes. • Another strategy for maximizing tax benets is to recognize losses in a porolio even when you want to connue to hold the stock (usually because you expect it to appreciate). You can sell the stock at a loss and reinvest the proceeds in the same stock. Provided the wash sale rules are avoided, you obtain the current benet of a tax loss without changing your economic posion. Even if the loss cannot be deducted fully in the current year (due to the $3,000 limit on oseng ordinary income) it can be carried forward indenitely to oset future gains. • Defer real estate capital gains tax using like-kind exchanges, also known as 1031 exchanges. While you were formerly able to use this strategy for various types of property, now it's limited to real estate. So if you're selling a piece of real estate and plan to invest in another one, you can use a like-kind exchange to postpone paying capital gains tax on the prot you made from the sale. Just make sure to follow all the rules and melines to qualify for this tax deferral because the technical requirements are unforgiving. • Exclude up to $250,000 of gain from the sale of your primary residence ($500,000 for married ling jointly), provided you've lived there for at least 2 of the past 5 years. If you don't meet To avoid the wash sale rules, make sure there are no purchases of idencal stock within the period beginning 30 days before and ending 30 days aer the sale.
9 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. this requirement due to specic reasons like job changes or health issues, you might sll qualify for a paral exclusion. Any gain above the exclusion is subject to capital gains tax. Don't forget to account for home improvements, as these can increase your home's basis and potenally reduce your taxable gain. • Consider whether gains should be deferred using a qualied opportunity zone investment. NET INVESTMENT INCOME TAX (NIIT) The NIIT is a 3.8% tax on certain types of net investment income of individuals, estates, and trusts that have income surpassing statutory threshold amounts. Individuals will owe the tax if they have Net Investment Income and also have modied adjusted gross income over the following thresholds: Modified Adjusted Gross Income(MAGI)* (Projected) 2023 2024 Joint or Qualifying Surviving Spouse $250,000 $250,000 Single $200,000 $200,000 Head of Household $200,000 $200,000 Married Filing Separately $125,000 $125,000 Estates & Trusts** See Note** See Note** MAGI*: MAGI starts with your Adjusted Gross Income(AGI) - which is your total income minus certain deducons like student loan interest, contribuons to a tradional IRA, and some others. Note**: For trusts and estates, the 3.8% Net Investment Income Tax applies to the smaller of two amounts: 1) The undistributed net investment income of the trust or estate, or 2) the amount by which the trust or estate's adjusted gross income (AGI) goes beyond the starng point of the highest tax bracket for trusts and estates, which are dierent from the tax brackets for an individual. Planning Strategies and Consideraons • Realize Capital Losses: If you ancipate having substanal capital gains, consider realizing capital losses to oset these gains. This can eecvely reduce your net investment income for NIIT purposes. • Time Your Income: Postpone or accelerate income or deducons to either stay below the threshold or take advantage of a year when you might not be subject to the tax. • Consider Tax-Exempt Investments: Interest from tax-exempt bonds isn't considered investment income for NIIT purposes. Reallocang some of your porolio into these might reduce your exposure to the NIIT. • Rental Real Estate: If you have income from renng properes, consider acvely parcipang in the rental acvity. Acve parcipaon or qualifying as a real estate professional could make the income non-passive and thus not subject to NIIT. "Acve Jump to Table of Contents
10 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. parcipaon" in real estate refers to a taxpayer's involvement in managing rental properes they own. The rules for acve parcipaon are relavely lenient. Generally, you are an acve parcipant if you are involved in management decisions such as approving new tenants, deciding on rental terms and approving expenditures. • Limit Passive Income: If possible, ensure that your parcipaon in business acvies avoids the classicaon of "passive," making the income from those acvies exempt from NIIT. More on this in the Passive Income & Passive Losses secon. • Opmize Investment Expenses: Certain investment-related expenses are deducble against net investment income. Review your porolio to ensure you're taking advantage of any available deducons. PASSIVE INCOME & PASSIVE LOSSES At its core, passive income is earnings derived from ventures in which an individual is not acvely involved. This oen includes rental properes, business ventures, or other enterprises in which one does not materially parcipate. Passive losses, conversely, are the decits from these acvies. Basics of Passive Acvies: • Loss Limitaon: Generally, losses produced by passive acvies can only oset passive acvity income. In other words, you can't use passive losses to decrease non-passive income, like your wages or investment income. • Credit Limitaon: Passive acvity credits can only reduce the tax aributable to passive acvies. If you have unused credits, they can be carried over to future years unl you have passive income to oset them. • Net Investment Income Tax (NIIT): The 3.8% NIIT is applicable to passive acvity income. However, if you materially parcipate in an acvity, the income from that acvity is exempt from the NIIT. Material Parcipaon: • A key term to understand in this realm is "material parcipaon." This pertains to your involvement in an acvity on a regular, connuous, and substanal basis. If you materially parcipate in an enterprise, the income or losses from that enterprise aren't considered passive. The disncon is crucial because passive losses can typically only oset passive income, not other forms of income like wages or dividends.
11 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Planning Strategies and Consideraons • Increase Parcipaon: By increasing your parcipaon in an acvity to more than 500 hours within the tax year, you can meet the material parcipaon test. Alternavely, if no one else parcipates more than you, and you have over 100 hours, or if you cumulavely parcipate more than 500 hours across all signicant parcipaon acvies, you can sasfy the criteria. • Grouping: Grouping acvies is a nuanced tax strategy where two or more acvies are treated as one for tax purposes, oen ulized to oset passive losses from one acvity with the income from another. To be eligible for grouping, acvies should form an "appropriate economic unit," taking into account factors like business similaries and shared resources. Did you parcipate more than 500 hours in day to day operaons? Did you do substanally all the work in the acvity? Did you parcipate more than 100 hours and more than anyone else? Did you parcipate more than 100 hours, but not more than 500 hours in two or more acvies so that the total parcipaon is more than 500 hours? Did you materially parcipate in this acvity for any 5 of the last 10 years? If this is a personal service acvity, did you materially parcipate for any 3 years before this year? Did you have any other facts or circumstances which indicate material parcipaon? You are not a material parcipant in the acvity. No No No No No No No No You are a material parcipant. Yes Yes Yes Yes Yes Yes Yes Jump to Table of Contents
12 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. • Consider Selling: If you sell your enre interest in a passive acvity in a fully taxable transacon, losses from that year (plus any carried over from previous years) above any net income or gain from all other passive acvies for that tax year, can be considered nonpassive losses. However, note that suspended passive acvity credits remain suspended even aer the acvity that produced them is sold. As a choice, you can increase the property's basis by the unused credits' amount. • Benets for Real Estate Professionals: Real estate professionals who materially parcipate in their rental real estate acvies have the advantage of treang losses and credits from these acvies as nonpassive. This can be especially benecial as it allows these losses to oset nonpassive acvity income. For a rental real estate professional, the dierence between acve and material parcipaon is crical. Acve parcipaon means you're involved in making key decisions, like approving tenants or handling lease terms, and you must own at least a 10% interest in the property. This allows for a loss deducon of up to $25,000, subject to income limitaons. On the other hand, material parcipaon means you're heavily involved in the rental acvity, meeng specic IRS tests such as working over 500 hours in the year on the rental or being the primary person handling the rental operaons. This level of involvement allows you to deduct rental losses without the limitaons that apply to acve parcipaon. In short, material parcipaon provides more tax benets but requires a more substanal me commitment and involvement. CRYPTOCURRENCY Given the increasing prominence of cryptocurrencies and the IRS’s growing aenon to these transacons, understanding the tax implicaons is crucial. Virtual currency, such as Bitcoin, serves various purposes: from paying for goods/services to being held as an investment. While some see it as a digital equivalent to real currency, it's crucial to note that virtual currencies don't have legal tender status anywhere. Taxable Transacons: • Selling crypto for government-issued currency. For instance, selling Bitcoin for U.S. dollars. • Crypto-to-crypto trades, like trading Bitcoin for Ethereum. • Using crypto for purchases or payments. If you used Bitcoin to buy a laptop or pay for a service, that's a taxable event. • Receiving cryptocurrencies from acvies such as blockchain "hard forks," mining, or staking. Nontaxable Transacons: • Purchasing crypto with currency issued by a government or central bank. • Receiving a bona de gi of crypto (unl the crypto is sold or exchanged), or giving a bona de gi of crypto (unless the gi is large enough that the transfer is reportable for gi tax purposes.) • Making a charitable donaon using cryptocurrency.
13 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. • Moving crypto from one digital wallet to another digital wallet, whether the wallet is online or oine. Staking Cryptocurrency: A topic in our Tax Law Updates secon is the tax treatment of staking. In essence, if you stake a cryptocurrency on a proof-of-stake blockchain and receive addional crypto units as validaon rewards, the FMV of these rewards is taxable. The FMV is determined when you have full control over these units, which usually means when you can sell or transfer them. Basis and Tracking Virtual Currency: Your basis in virtual currency is its Fair Market Value (FMV) when received. Once purchased, cryptocurrencies are stored in a digital "wallet." For clarity in tracking the basis and idenfying sold units, it's best to maintain separate wallets. While the Highest In, First Out (HIFO) accounng method can minimize current tax costs, the IRS defaults to the First In, First Out (FIFO) method if no detailed records are maintained. See the Addional Resources secon for links to some commonly used crypto tracking/tax soware. Planning Strategies and Consideraons • Loss Harvesng and Absence of Wash Sale Rules: If you hold cryptocurrency that has declined in value, consider selling it to realize the loss, which can oset other capital gains. Unlike tradional securies, wash sale rules currently do not apply to cryptocurrencies. This means you can repurchase the same cryptocurrency immediately aer selling at a loss, allowing you to maintain your posion while also capturing a tax benet. • Charitable Contribuons: Donate cryptocurrency to charitable enes. Donaons exceeding $5,000 require a qualied appraisal. • Reporng Requirements: o Form 8938: Required if assets in a foreign account exceed $50,000. o FBAR: Required for crypto owners with over $10,000 in foreign nancial accounts, including accounts with cryptocurrency exchanges. ALTERNATIVE MINIMUM TAX (AMT) The Alternave Minimum Tax (AMT) was designed to ensure that high-income taxpayers pay a minimum amount of tax, even if they have substanal regular tax deducons. The AMT accomplishes this by adding back certain deducons and then applying an AMT rate to the AMT taxable income. How it's calculated: AMT starts with regular taxable income and then is adjusted for specied preference items and exclusions. This process oen involves adding back several deducons, such as those for state and local taxes. Once AMT income is determined, a specic AMT exempon is subtracted. Jump to Table of Contents
14 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. However, this exempon is subject to phase-out for higher income levels, reducing the exempon amount as income rises. The remaining amount aer exempon is then taxed at AMT-specic rates, generally 26% for a poron and 28% beyond a certain threshold. If the computed AMT exceeds your regular tax liability, you then pay the dierence in addion to the regular tax. AMT Taxable Income AMT Exemption 2023 (Projected) 2024 Joint or Qualifying Surviving Spouse $126,500 $133,300 Single $81,300 $85,700 Married Filing Separately $63,250 $66,650 Estates and Trusts $28,400 $29,900 AMT Exemption Phaseout Threshold Joint or Qualifying Surviving Spouse $1,156,300 $1,218,700 Single $578,150 $609,350 Married Filing Separately $578,150 $609,350 Estates and Trusts $94,600 $99,700 Planning Strategies and Consideraons • Timing of Income: If you ancipate being subject to the AMT this year but not the next, consider deferring certain types of income, if possible, to the next year. • State and Local Taxes: If you're on the verge of the AMT, consider the ming of state and local tax payments, since they're added back for AMT purposes. • Investment Choices: Be cauous with private acvity bonds. While the interest is tax-free for regular tax purposes, it's taxable under AMT. • Exercise of Incenve Stock Opons (ISOs): The dierence between the fair market value of the stock and the exercise price (the "spread") is a preference item for AMT. Consider the ming and amount of ISO exercises. This is a tricky area that requires special tax planning eorts. • Tax Credits: Some tax credits that reduce regular tax do not reduce AMT. DEDUCTIONS & CREDITS STANDARD DEDUCTION For 2023, the IRS has adjusted standard deductions for inflation. The new amounts are: 2023 (Projected) 2024 Joint or Qualifying Surviving Spouse $27,700 $29,200 Single $13,850 $14,600 Head of Household $20,800 $21,900 Married Filing Separately $13,850 $14,600
15 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. ITEMIZED DEDUCTIONS Itemized deducons are specic expenses allowed by the IRS that can be subtracted from your adjusted gross income to lower your taxable income and, consequently, your tax liability. Common itemized deducons include medical expenses, state and local taxes, mortgage interest, and charitable contribuons. By carefully reviewing your expenditures for the year and gathering necessary documentaon, we can maximize these deducons and work together to opmize your nancial posion. Planning Strategies and Consideraons • Medical Expenses: If possible, bunch elecve medical procedures into a single year to exceed the threshold. Also, remember to account for medical mileage, prescripon costs, and insurance premiums not paid with pre-tax dollars. • State and local taxes: Be cauous when prepaying property taxes; ensure they're assessed. Consider the ming of state esmated tax payments, but be mindful of the $10,000 cap. The maximum amount you can deduct for state and local income, sales, and property taxes combined is $10,000 ($5,000 if you're married ling separately). This means if your total state and local taxes are above $10,000, you won't be able to deduct the amount that exceeds this limit. • Mortgage Interest: You can only deduct interest on the rst $750,000 of indebtedness for mortgages taken out aer Dec 15, 2017. Earlier loans have a $1 million limit. Home equity loan interest is deducble only if the loan is used to buy, build, or improve the taxpayer's home. If renancing, ensure total mortgage debt remains below the cap for interest deducbility. Also, ensure home equity debt is used for home improvements to be deducble. • Charitable giving: See next topic for a more detailed discussion. • Personal casualty and the losses: Maintain comprehensive records of property and its value. If you incur a loss in a federally declared disaster, meculously document damages, insurance recoveries, and any associated claims. CHARITABLE GIVING Carefully planned and executed charitable donaons can provide signicant tax advantages while furthering the causes that maer most to you. The Tax Cuts and Jobs Act (TCJA) of 2017 increased the Adjusted Gross Income (AGI) limit for deducng cash contribuons to 60% for years 2018-2025. However, to ulize these deducons, you must itemize, which, given the increased standard deducon under TCJA, might not always be benecial or even aainable. Planning Strategies and Consideraons Note: If you are at least age 65 or blind, you can claim an addional standard deducon of $1,850 in 2023 and $1,950 in 2024. If you are both 65 and blind, the amount is doubled. Jump to Table of Contents
16 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. • Donang Appreciated Long-Term Capital Gain Property: If you have appreciated long-term capital gain property, donang it directly to a qualied charitable organizaon can be more advantageous than selling and then donang the net proceeds. This strategy allows you to bypass capital gains tax and, at the same me, get a deducon for the full fair market value (FMV) of the property. • When Stocks Decline in Value: For stocks that have decreased in value, consider selling them to recognize a capital loss and then donang the sale proceeds to charity. • Cash donaons are deducble in the year they are made. This includes contribuons made via check, delivered or mailed before year-end, and those charged to a credit card—even if the credit card payment is deferred to the next year. However, note that the interest on any credit card balance is not deducble as a charitable contribuon. • Valuaon and Appraisal: For donaons exceeding $5,000 in value (excluding cash or publicly traded securies), a qualied appraisal is required. This ensures that your deducon is well-supported and reduces potenal IRS challenges. Timing of the appraisal is crical as well. • Waing for long-term treatment: If considering a donaon of appreciated short-term capital gain property, wait unl it qualies as long-term to maximize the deducon. • Use the "bunching" technique: Combine itemized deducons in one year and take the standard deducon in the next, enhancing overall deducons over me. • Donor-Advised Funds (DAFs): DAFs can oer a unique opportunity for charitable contribuons. By contribung appreciated securies to a DAF, you can obtain an immediate tax deducon and then direct the fund to disburse cash contribuons to charies of your choice at a later date. • Charitable Organizaons: Ensure that the charity is recognized by the IRS to ensure the deducbility of your gi. Check the IRS Tax Exempt Organizaon Search to verify an organizaon's status here. • Qualied Charitable Distribuons (QCDs) from IRAs: You can make donaons directly from your IRA. See the Required Minimum Distribuons secon. CHILD TAX CREDIT (CTC) Next, you'll nd a concise guide and a chart summarizing credit amounts and phase-out thresholds. Credit Details Years 2018-2025 (excluding 2021) Post-2025 CTC Amount(Per Qualifying Child) $2,000 $1,000 Refundable Portion of CTC $1,500 N/A Earned Income Threshold $2,500 $3,000 Other Dependent Credit(ODC) $500(Non-refundable) N/A AGI Phase-Out Start $400,000(Joint) See Below* $200,000(Others)
17 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. *Post-2025 AGI Phase-Out Thresholds: $110,000(Joint), $75,000(Single, Head-of-Household, Qualifying Widow(er)), and $55,000 (Married Filing Separate). Planning Strategies and Consideraons • Adjust Wage Withholding: Given the enhanced CTC, consider revising wage withholdings via Form W-4 if you ancipate a reduced tax due. • Qualifying Child Criteria: Your child must be under the age of 17 at the end of the tax year and meet specic requirements to be a "qualifying child" for CTC. • Refundable Credit: A refundable credit means if the CTC exceeds your tax liability, you can get a refund. The maximum refundable amount is $1,500 per qualifying child with a $2,500 earned income threshold. • Dependent Credits: Apart from the CTC, there's a $500 non-refundable credit for each dependent not qualifying under CTC rules, like older children or elderly parents. This "Other Dependent Credit" or "family credit" requires a taxpayer idencaon number. • Importance of Social Security Numbers (SSN): Ensure you have an SSN for each qualifying child when claiming the CTC. If they do not have an SSN, you can claim the $500 ODC using an Individual Taxpayer Idencaon Number(ITIN) or Adopon Taxpayer Idencaon Number(ATIN). RETIREMENT TRADITIONAL & ROTH IRAS Individual Rerement Accounts (IRAs) are pivotal tools for rerement savings. The Tradional and Roth IRAs, while oering dierent tax advantages, come with specic contribuon and income limits. This secon highlights these limits and strategies to leverage both IRA types eecvely. 2023 2024 IRA Contribution Limit (Traditional and Roth) $6,500 $7,000 Catch-up contribution (age 50 or older) $1,000 $1,000 MAGI(Phaseout Range) - Traditional IRA Joint $116,000-$136,000 $123,000-$143,000 Joint (spouse not a plan participant) $218,000-$228,000 $230,000-$240,000 Single $73,000-$83,000 $77,000-$87,000 Head of Household $73,000-$83,000 $77,000-$87,000 Married Filing Separately $0-$10,000 $0-$10,000 MAGI(Phaseout Range) - Roth IRA Joint $218,000-$228,000 $230,000-$240,000 Single $138,000-$153,000 $146,000-$161,000 Head of Household $138,000-$153,000 $146,000-$161,000 Married Filing Separately $0-$10,000 $0-$10,000 Jump to Table of Contents
18 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Planning Strategies and Consideraons Traditional IRA • Contribute if you expect to be in a lower tax bracket in rerement. • Consider conversions to Roth IRA in years of lower income. • Ensure you take Required minimum distribuons (RMDs) to avoid hey penales. RMDs are the minimum amounts you must withdraw from your rerement accounts each year. You generally must start taking withdrawals from your tradional IRA, SEP IRA, SIMPLE IRA, and rerement plan accounts when you reach age 72 (73 if you reach age 72 aer Dec. 31, 2022). Roth IRA • Contribute if you expect to be in a higher tax bracket in rerement or if you appreciate the exibility of no RMDs. • High earners, who are directly ineligible, can contribute to a Tradional IRA and convert to a Roth. • Consider withdrawing from taxable and tax-deferred accounts before Roth to leverage its tax-free growth potenal. • RMDs do not apply to Roth accounts unless they are inherited. Other Consideraons • Consider making contribuons early in the year to maximize growth potenal. • Be aware of the income limits for direct contribuons to Roth IRAs and for deducbility of Tradional IRA contribuons. • If you’re age 50 or older, take advantage of "catch-up" contribuons. • Having both Tradional and Roth IRAs can provide tax diversicaon in rerement, allowing exibility in managing taxable income. • Roth IRAs can be advantageous for heirs, as they inherit the assets tax-free. • Early withdrawal penalty: o Tradional IRA: A 10% penalty applies to amounts withdrawn before age 59½, in addion to the regular income tax, unless specic excepons apply. o Roth IRA: A 10% penalty on earnings withdrawn before age 59½ and before the account is ve years old. Contribuons (but not earnings) can typically be withdrawn tax and penalty-free at any me. SIMPLE IRA The Savings Incenve Match Plan for Employees (SIMPLE) IRA is a rerement savings plan primarily intended for small businesses and their employees. However, as an individual contributor, it's important to understand the tax implicaons, limits, and potenal penales associated with this savings vehicle. Note: Some 401(k) plans now have a Roth opon. Roth 401(k) rules dier from the rules in this secon.
19 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. 2023 2024 Contribution Limit $15,500 $16,000 Catch-up contribution(age 50 or older) $3,500 $3,500 Planning Strategies and Consideraons • Unlike Roth IRAs, which have income limits determining eligibility for contribuons, the SIMPLE IRA does not set explicit income caps for individual contributors. However, eligibility to parcipate in a SIMPLE IRA typically depends on the employer's established criteria, which might include factors like having received at least a certain amount in compensaon during the year. • Early withdrawal penalty: o General Penalty: Distribuons from a SIMPLE IRA before the age of 59½ are generally subject to ordinary income tax, plus a 10% early withdrawal penalty. o Special Rule: If you withdraw funds from a SIMPLE IRA within the rst 2 years of parcipaon, the early withdrawal penalty increases to 25%. SEP IRA Another valuable rerement tool to consider is the Simplied Employee Pension (SEP) IRA. SEP IRA Contribution Criteria 2023 2024 Maximum % of Compensation 25% 25% Maximum Dollar Amount $66,000 $69,000 Note: Contribuons to SEP-IRAs and SIMPLE-IRAs do not count against your annual limit for Tradional and Roth IRAs. Planning Strategies and Consideraons • Double Contribuon Opportunity: If you are 50 or older, with sucient earnings, you can contribute $7,500 to a Tradional or Roth IRA for 2023, even if the maximum is contributed to a SEP or SIMPLE IRA on your behalf. • New Rerement Plan Tax Credit: If you're a small employer iniang a new rerement plan, you could qualify for a non-refundable income tax credit. This can be either $500/year or up to $5,000 for associated administrave and rerement-educaon expenses. Furthermore, the SECURE 2.0 Act of 2022 introduced an addional credit amount for certain employer contribuons to small employer pensions. Jump to Table of Contents
20 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. • Roth Contribuon Opon: Beginning in 2023, the SECURE 2.0 Act allows employers to oer the opon to treat SEP and SIMPLE IRA contribuons (from both the employee and employer) as Roth contribuons. • Choosing Between SIMPLE IRA and SEP: The ideal choice between a SIMPLE IRA and a SEP varies based on each employer's situaon. However, for business owners with few employees and relavely lower income, a SIMPLE IRA might be advantageous. On the ip side, both SEP and SIMPLE IRAs allow employees immediate access to their funds, which might dissuade some employers. 401(k) The 401(k) plan is one of the most popular rerement savings vehicles for employees working in the United States. It oers tax-deferred growth on contribuons, potenal employer matching, and a range of investment opons. 2023 2024 Contribution Limit $22,500 $23,000 Catch-up contribution(age 50 or older) $7,500 $7,500 Planning Strategies and Consideraons • For contribuons made aer December 29, 2022, a 401(k) plan may allow a parcipant to designate some or all matching and nonelecve contribuons as designated Roth contribuons. This applies to the extent the employee is fully vested in the contribuons. Any such matching contribuons will be included in the employee’s wage income for the year. • For plan years beginning aer December 31, 2023, the SECURE 2.0 Act requires catch-up contribuons for high-wage taxpayers to be made to a Roth 401(k). This rule applies to individuals who, for the preceding calendar year, had wages in excess of $145,000 (2023 wages for the 2024 plan year). However, the IRS announced a two-year transion period and will treat catch-up contribuons in 2024 and 2025 as sasfying the provisions of the law, even if the contribuons are not designated Roth contribuons. • Unlike some rerement savings vehicles, the 401(k) does not have income limits that directly aect contribuon eligibility. However, in cases where the plan is considered "top-heavy" (primarily beneng higher-paid employees), certain restricons might apply to highly compensated employees. It's essenal to consult your employer or plan administrator if you believe this could apply to you.
21 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. 403(b) The 403(b) plan is generally available to employees of public schools, certain non-prots, and some churches, oering exclusive opportunies to save for rerement while enjoying tax benets. 2023 2024 Contribution Limit $22,500 $23,000 Catch-up contribution(age 50 or older) $7,500 $7,500 Note: Employees with at least 15 years of service may be eligible to make addional contribuons to a 403(b) plan in addion to the regular catch-up for parcipants who are age 50 or over. Planning Strategies and Consideraons • The SECURE Act 2.0 of 2022 brought forth several changes for 403(b) plans mirroring the rules for 401(k) plans. Some key changes are listed below: o Conformity of hardship distribuon rules with 401(k) plans. o For specic employees, age 50 catch-up contribuons will be mandated on a Roth basis starng in 2024. o Both 403(b) and 401(k) plans can now join mulple employer and pooled employer plans. REQUIRED MINIMUM DISTRIBUTIONS (RMDS) The beginning age for taking required minimum distribuons (RMDs) rises to age 73 from 72 for owners of tradional IRAs, 401(k)s and other workplace rerement plans. This applies to account owners who turn 72 aer 2022. If you turn 73 in 2023, you must take your rst RMD by April 1, 2024. People who work past age 73 can generally delay taking RMDs from their current employer’s 401(k) unl they rere. There is a penalty for people who fail to take their RMD, but that penalty is lower than in past years. Starng in 2023, the excise tax for such failures is 25% of the missed RMD amount, which is down from 50%. Addionally, the penalty goes down to 10% for failures that are corrected in a mely manner. Tradional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans like 401(k)s are subject to RMD rules. Jump to Table of Contents
22 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. The below chart will help you determine your required beginning date (RBD) for sasfying the RMD rules: Date of Birth Age of RBD June 30, 1949, and prior 70 1/2 July 1, 1949 - December 31, 1950 72 January 1, 1951 - December 31, 1959 73 January 1, 1960, and thereafter 75 Planning Strategies and Consideraons • Delaying the Start: The rst RMD can be delayed unl April 1st of the year aer you turn 73. However, this means you'll have to take two distribuons in that year, which can increase taxable income for the year, so oen it makes sense to take your RMD in the same year as your RBD age. • Accelerang Income: For taxpayers who are moved into higher tax brackets because of RMDs, the delay in RMDs based on the later ages in SECURE 2.0, will allow taxpayers to benet from accelerang income into more years not requiring RMDs when taxes can be paid at lower tax rates. • Roth Conversions: Consider converng tradional IRA funds to a Roth IRA. While the conversion is taxable, Roth IRAs are not subject to RMDs, and qualied distribuons are tax-free. • Tax Eciency in Withdrawals: When considering withdrawals beyond RMDs, evaluate the tax implicaons of pulling funds from taxable, tax-deferred, and tax-free accounts to opmize tax eciency. • Ulize QCDs: If charitable giving aligns with your goals, use QCDs to meet RMD amounts. This strategy can reduce taxable income and simultaneously benet the chosen charity. These distribuons are made directly to charies from your IRAs, and the amount of the contribuon is neither included in your gross income nor deducble on Schedule A, Form 1040. However, you are sll entled to claim the enre standard deducon. o Qualied Charitable Distribuons (QCDS): ▪ QCDs are direct transfers of funds from an IRA, payable to a qualied charity, totaling any poron of or up to $100,000 annually. ▪ Only available for owners and beneciaries age 70½ or older. ▪ QCDs can total more than your RMD. • Ensure that beneciary designaons are up to date on all rerement accounts, and be aware of the post-death RMD rules which can vary based on the type of beneciary (spouse, non-spouse, enty, or no beneciary).
23 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. SOCIAL SECURITY Taxaon of Social Security Benets: • Provisional Income: o To determine if Social Security benets are taxable, one must calculate their "provisional income." This includes half of your Social Security benets plus other income (including tax-exempt interest). • Tax Thresholds: o Single, Head of Household, or Qualifying Widow(er): Benets may be taxable if provisional income is over $25,000. o Married Filing Jointly: Benets may be taxable if provisional income is over $32,000. o Married Filing Separately and lived apart from your spouse all year: Benets may be taxable if provisional income is over $25,000. Planning Strategies and Consideraons • You can start receiving social security rerement benets at age 62. However, the full benet will be permanently reduced for each month before you reach the FRA (Full Rerement Age). Therefore, the monthly benets at age 62 will be less than the benets would have been at the FRA. The reducon in benets is permanent and can aect your spouse’s benets at your death as well. • If you choose to work past your FRA and choose to delay receiving benets while working, the benets paid later will be higher because of three consideraons: (a) the addional years of earnings, hopefully replacing lower earnings during the 35-year calculaon period; (b) increases in the indexing amounts used to calculate the primary insurance amount (PIA); and (c) the delayed rerement credit. • Even if rerement is delayed, you should sign up for Medicare at age 65. In some circumstances, medical insurance costs more if you delay applying for it. • In addion to evaluang the best me to begin receiving social security benets, you should consider several issues when evaluang the early rerement decisions: o The Consumer Financial Protecon Bureau oers a social security claiming tool to help workers decide the best age for them to start receiving rerement benets here. DEPENDENTS & EDUCATION STUDENT LOAN INTEREST You may deduct the lesser of $2,500 or the actual amount of interest you paid on a qualied student loan during the year. This is an "above-the-line" deducon, meaning it reduces your adjusted gross income (AGI) and is available even if you do not itemize deducons on your tax return. Jump to Table of Contents
24 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. 2023 2024 Deduction $2,500 $2,500 MAGI(Phaseout Range) Joint $155,000-$185,000 $165,000-$195,000 Single $75,000-$90,000 $80,000-$95,000 Head of Household $75,000-$90,000 $80,000-$95,000 Married Filing Separately $75,000-$90,000 $80,000-$95,000 To qualify for the deducon: • The loan must have been taken out solely to pay for qualied educaon expenses for you, your spouse, or someone who was your dependent at the me the loan was obtained. • The loan cannot be from a related person or made under a qualied employer plan. • The student must have been enrolled at least half-me in a program leading to a degree, cercate, or other recognized credenal. • The expenses must have been incurred within a reasonable period before or aer the loan was taken out. KIDDIE TAX The "Kiddie Tax" is designed to prevent high-income taxpayers from shiing income to their children to take advantage of the children's lower tax rates. Essenally, it taxes a poron of a child's unearned income (from sources like interest, dividends, and capital gains) at the parent's tax rate rather than the child's oen lower rate. Who is Aected? The Kiddie Tax applies to: • Children under 18 at the end of the year. • Children who are 18 at the end of the year, but their earned income does not exceed half of their annual support. • Full-me students between the ages of 19 and 23 at the end of the year if their earned income does not exceed half of their support. How is the Tax Calculated? • First, the child's earned income (e.g., from a job or self-employment) is taxed at the child's standard tax rate. • A small poron of the child's unearned income is tax-free ($1,250 for 2023, see chart below). • The next segment of the child's unearned income ($1,250 for 2023, see chart below) is taxed at the child's tax rate. • Any remaining unearned income beyond that is taxed at the parents' marginal tax rate.
25 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. 2023 2024 Tax-free unearned income $1,250 $1,300 Next level taxed at child's tax rate $1,250 $1,300 $2,500 $2,600 Note: A parent will be able to elect to include a child's income on the parent's return for 2023 if the child's gross unearned income is more than $1,250 and less than $12,500($1,300 and $13,000 in 2024). Planning Strategies and Consideraons • Shiing Income: Instead of giing assets that produce unearned income, consider giing assets that appreciate in value but do not produce current taxable income. For example, stock that does not pay dividends. • Educaonal Savings: Use tax-advantaged educaonal savings accounts, like 529 plans or Coverdell Educaon Savings Accounts. Income earned within these accounts is not subject to the Kiddie Tax. They also grow tax-free if the funds are used for a qualifying expense. • Roth IRAs for Working Kids: If the child has earned income, consider contribung to a Roth IRA on their behalf. While there's no current deducon, the money will grow tax-free for the child's future needs. • Age Consideraons: If possible, consider delaying large gis unl the child is no longer subject to the Kiddie Tax (e.g., aer age 23 if not a full-me student or when they have enough earned income to provide over half of their support). • Evaluate Your Tax Bracket: If you are in a low tax bracket, the impact of the Kiddie Tax might be minimal. Conversely, if you are in a high tax bracket, more planning might be necessary. EMPLOYING FAMILY MEMBERS Leveraging family employment can be an eecve strategy for tax planning, but it's crucial to understand the rules surrounding this approach. Understanding Family Employment Rules: Family businesses oen employ parents, children, and even grandchildren. The IRS generally treats such employment like any other, meaning family members' wages are subject to federal income tax withholding (FITW), social security and Medicare (FICA) taxes, and federal unemployment (FUTA) tax. However, certain exempons may apply for FICA or FUTA taxes, even though FITW sll applies. Note: The denion of a family member, for these rules, encompasses spouses, children (which includes adopted, foster, and stepchildren), and ancestors. Jump to Table of Contents
26 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Tax Benets of Employing Your Children: Employing your child in your closely held business can lead to signicant tax benets. For instance, in 2023, a child could earn up to $20,350 without paying any income taxes. This can be broken down into a standard deducon of $13,850 and an IRA deducble contribuon of $6,500. By paying wages to a child, you can shi income to their lower tax bracket and reduce the overall family tax burden, including FICA taxes. Addionally, doing so may help dodge the "kiddie tax" for children under 18 or those between 19 to 23 if they are students and provide over half of their own support with earned income. Be cauous, though; the IRS pays close aenon to ensure the wages are jusable and earned. Tax Implicaons Based on Business Type: Sole Proprietorship: If your family business operates as a sole proprietorship, there are instances where a family member's wages can be exempt from certain taxes: • Children under 18 employed by a parent are FICA-exempt. For FUTA, the age limit is under 21. • A spouse's employment is exempt from FUTA but is subject to FITW and FICA. • A parent employed by their child is FICA-exempt. However, both FITW and FICA apply in all other cases. Corporaons (C or S Corporaon): If your business operates as a C or S corporaon, all family members' wages are subject to FITW, FICA, and FUTA without any exempons, regardless of age or relaonship. Partnership: If your business is a partnership, every family member's wages are subject to FICA and FUTA unless the son or daughter exempon applies and only the parents are partners. EDUCATION It's essenal to explore avenues that opmize the nancial landscape for your college-bound children or for those already in college. Coverdell and 529 plans, among other opons, present viable tax advantages. Planning Strategies and Consideraons Planning for College Expenses:
27 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. • 529 Plans: Contribuons aren’t deducble, but they grow tax-free unl used. However, any non-qualied distribuons can aract a tax plus a 10% penalty. Note that up to $10,000 per year can be used for elementary or secondary schooling, including private schools. o New rules (Starng in 2024) permit tax-free rollovers from 529 accounts to Roth IRAs, given specic condions. ▪ Lifeme 529 rollover limit: $35,000 ▪ Roth IRA must have the same beneciary as the 529 plan ▪ 529 account eligibility: 15+ years old ▪ No rollover for contribuons made in the last ve years ▪ Rollovers adhere to Roth IRA annual limits • Coverdell ESAs: An annual contribuon limit of $2,000 applies for each child under 18 (except beneciaries with special needs.) While contribuons aren’t deducble, distribuons for qualied educaon expenses are tax-free. • Transferring Ownership to Children: Two parents can transfer up to $34,000 in assets or cash to each child this year and avoid gi tax. However, if it’s a joint gi, a return ling may sll be required. If the "kiddie tax" does not apply, the child's tax rate on income could be as low as 10%. However, beware of situaons where the kiddie tax applies; your child's investment income might be taxed at your higher rate. • Tax-Exempt Bonds: Invesng in tax-exempt bonds, such as college savings bonds and “stripped” municipal bonds, can oer a tax-ecient growth strategy. Paying College Expenses: • Tuion Tax Credits: The American Opportunity tax credit (AOTC) and Lifeme Learning credit can provide tax relief. The AOTC, oering up to $2,500 per student for the rst four college years, is 40% refundable. • Scholarships: Scholarships used for qualied expenses (excluding room and board) are typically tax-free. However, they might reduce potenal tax credits. • Employer Assistance & Tuion Reducon Plans: Payments made by your employer for your child's college can be tax-free under specic condions. • Payments by Grandparents or Others: Direct payments made by others (like grandparents) to educaonal instuons for your child's tuion are exempt from the gi tax. • Borrowing Against Rerement Plans: This can be an alternave source of funds, but there are implicaons to consider, including potenal penales and taxes. • Withdrawals from Rerement Plans: Funds from IRAs and some qualied rerement plans can be ulized for educaon without incurring the 10% early withdrawal penalty, though regular distribuon income taxes will apply. Jump to Table of Contents
28 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. MEDICAL HEALTH SAVINGS ACCOUNT Health Savings Accounts (HSAs) are tax-advantaged savings vehicles specically designed for individuals covered by High Deducble Health Plans (HDHPs). They oer the unique benet of triple tax savings: tax-deducble contribuons, tax-free earnings, and tax-free withdrawals for qualied medical expenses. 2023 2024 Contribution(Self-only coverage) $3,850 $4,150 Contribution(Family coverage) $7,750 $8,300 Catch-up contribution(age 55 or older) $1,000 $1,000 Unlike many other tax-advantaged accounts, HSAs do not have specic income limits that aect contribuon eligibility. Instead, the primary eligibility requirement is that the individual must be covered by an HDHP and not be enrolled in Medicare or claimed as a dependent on someone else's tax return. Planning Strategies and Consideraons • Portability and Flexibility: HSAs are fully portable. This means that even if you change employers or leave the workforce, the HSA remains with you. Funds in the HSA can also be invested, oering the potenal for growth over me, and there's no requirement to withdraw funds by a certain age, nor in a certain year. • Early withdrawal penalty, if non-medical withdrawal: o Before Age 65: The distribuon is subject to ordinary income tax and an addional 20% penalty. o Age 65 or over: The distribuon is subject to ordinary income tax but the addional 20% penalty does not apply. Essenally, aer age 65, an HSA can funcon similarly to a tradional IRA for non-medical withdrawals, though using funds for medical expenses remains tax-free. FLEXIBLE SPENDING ACCOUNT Flexible Spending Accounts (FSAs) provide a valuable opportunity to set aside pre-tax dollars for medical expenses, but it's essenal to be mindful of contribuon limits and potenal forfeitures. 2023 (Projected) 2024 Contribution $3,050 $3,200 Max Carryover Amount $610 $640
29 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Benets of an FSA: • Contribuons made by your employer can be excluded from your gross income. • No employment or federal income taxes are deducted from your FSA contribuons. • Reimbursements from your FSA for qualied medical expenses are tax-free. • You can get reimbursements from the FSA even before you've deposited all the funds for the year. Planning Strategies and Consideraons • Use-it-or-Lose-it Rule: FSAs typically adhere to a use-it-or-lose-it rule. Amounts unspent by the end of the plan year are generally forfeited. However, there are two excepons: o Grace Period: Your plan may oer a grace period extending up to 2 1/2 months aer the plan year ends. During this period, you can use the remaining FSA funds from the previous year for qualifying medical expenses. o Carryover: Some plans might allow you to carry over up to $610 in 2023 (or a specied lower amount) of unspent funds into the next year. This carryover doesn't impact the maximum you can contribute for the next year. Please note that a plan can provide either the grace period or a carryover, but not both. Check with your HR department to understand which opon, if any, your FSA plan oers. • You can use your FSA funds for a wide range of medical expenses, including over-the-counter medicines. Expenses can be used for: o Yourself and your spouse; all dependents you claim on your tax return; anyone you could have claimed as a dependent under specic criteria; and, your child under age 27 at the end of your tax year. o Note: Health insurance premiums, long-term care coverage or expenses, and amounts covered by another health plan are not eligible for FSA reimbursement. LONG-TERM CARE INSURANCE Long-Term Care Insurance is designed to cover services that aren't covered by health insurance, Medicare, or Medicaid. These services oen include assistance with roune daily acvies such as bathing, dressing, or geng in and out of bed. Premiums paid on a tax-qualied long-term care insurance policy can be treated as medical expenses, and therefore, may be deducble based on certain age-related limits. Age 2023 2024 Over 70 $5,960 $5,880 Age 61-70 $4,770 $4,710 Age 51-60 $1,790 $1,760 Age 41-50 $890 $880 Under 41 $480 $470 Jump to Table of Contents
30 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Tax Advantages: • Premium Deducons: Premiums paid for a qualied long-term care insurance policy can be deducble as medical expenses. However, the amount you can deduct increases with age as seen above. • Benets Received: Generally, long-term care insurance benets are not taxable as income. This is true for both per diem and reimbursable policies. • Hybrid Policies: Some life insurance policies or annuies oer riders for long-term care. The benets paid out for long-term care from these hybrid policies typically aren't considered taxable income. Planning Strategies and Consideraons • Plan Early: Premiums for long-term care insurance are based on age and health. By iniang a policy earlier in life, you might lock in a lower premium. • Inaon Protecon: Consider a policy that oers inaon protecon. This ensures that your benet keeps pace with the rising costs of care. • State Partnerships: Many states have partnership programs that provide asset protecon if you ever need to apply for Medicaid aer using your policy benets. • Daily or Monthly Benet: Determine the amount of coverage you'll need, whether it's a daily or monthly benet. Factor in current costs in your area and any family support you might receive. GIFTS & ESTATES GIFT TAX EXCLUSION When individuals give substanal gis to others, they might face implicaons under the U.S. federal gi tax regulaons. Understanding these rules can ensure compliance while opmizing one's tax posion. You can give up to $17,000, for 2023, to any individual recipient in a single year without incurring gi tax or even the requirement to report the gi. If you're married, you and your spouse can each give $17,000, allowing for a combined total of $34,000 to a single recipient without incurring a gi tax. However a joint gi must be disclosed on a gi tax return. 2023 2024 Annual Exclusion $17,000 $18,000 Beyond the annual exclusion, there's also a lifetime gift tax exemption: 2023 2024 Lifetime Exclusion $12,920,000 $13,610,000
31 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Planning Strategies and Consideraons • Spousal Gis: Gis between spouses are generally unlimited and free from gi tax due to the unlimited marital deducon (with certain restricons for non-cizen spouses). • Educaon and Medical Expenses: Payments made directly to educaonal instuons for tuion or to medical care providers for medical expenses on someone's behalf are excluded from the gi tax, even if they exceed the annual exclusion amount. • Gi Spling: If you're married, consider leveraging the opon to "split" gis. This allows a couple to combine their annual exclusion amounts even if only one spouse funds the enre gi. But, you must le a gi tax return to make this elecon. • Unied Credit: The lifeme gi tax exempon is unied with the estate tax exempon. This means that gis given beyond the annual exclusion amount reduce the available exempon for estate tax purposes upon death. • 529 Plans: Contribuons to 529 educaon savings plans can be front-loaded for up to ve years. This means you can make a larger contribuon (up to 5 mes the annual exclusion amount) and treat it as if it were spread over a ve-year period for gi tax purposes. You must le a gi tax return to elect this. • Gis in Trust: Seng up trusts like the Crummey Trust or the Grantor Retained Annuity Trust (GRAT) can allow for more complex giing strategies that provide addional control over assets while sll leveraging gi tax exclusions and exempons. • Portability: A feature that allows a surviving spouse to ulize any unused poron of the deceased spouse's estate and gi tax exempon. If one spouse does not ulize the full $12.92 million exempon in 2023, the unused poron can be transferred to the surviving spouse, provided an elecon is made on the deceased spouse's estate tax return. This can increase the amount the surviving spouse can give tax-free during their lifeme or upon death. For this reason, it may be wise to le an estate tax return on the rst of a couple to die, even if their ling is not required. ESTATES Since 2011, there has been a signicant increment in the estate tax exempon. Inially set at $5 million, it rose to $10 million for estates of decedents passing away starng in 2018. Adjusted for inaon, the exempon stands at $12,920,000 for 2023, up from $12,060,000 in 2022. Due to this generous exempon, numerous estates will be exempt from federal estate tax. Before these changes, many estate plans were primarily aimed at avoiding estate tax and paid lile aenon to minimizing income tax. Now, with many estates exempt from estate tax, the focus has shied to saving on income taxes. Though balancing both income and transfer tax savings was a challenge when exempons were low, the large current exempon facilitates this objecve. Jump to Table of Contents
32 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. Planning Strategies and Consideraons • Gis Using Annual Gi Tax Exclusion: While previously employed to save on estate tax, the current large exempon might render such gis less pernent for tax savings. Moreover, giing appreciated assets can present potenal income tax costs for the donee, as they assume the donor's basis, potenally leading to capital gains tax upon sale. Thus, the raonale for giing should now extend beyond merely tax consideraons. • Planning to Equalize Spouses' Estates: With the advent of "portability," there's more exibility for married couples in terms of estate tax exempons. Now, unused exclusions from a deceased spouse can be used by the surviving spouse. This introduces more strategic opons for estate planning. • Estate Exclusion and Valuaon Discounts: Strategies that once sought to exclude property from the estate might not be as appealing now. The potenal step-up in basis at death, which eradicates the capital gains tax on the appreciaon of assets, makes certain strategies more appealing, especially given the narrowing gap between transfer tax and capital gains tax rates. • IRS Scruny and Estate Planning: The IRS occasionally requests estate planning details during audits. They might seek permission to inspect records from aorneys, banks, insurance agents, and accountants. • Standard Estate Planning Techniques: Making lifeme gis to beneciaries is a common strategy. However, this isn't feasible for rerement assets. Some individuals with sizable rerement plans purchase life insurance to cover expected estate taxes. This insurance can provide liquidity for estate tax payments. Addionally, it's worth nong that some pension and prot-sharing plans oer life insurance MISCELLANEOUS ONLINE IRS ACCOUNT Stay informed and manage your tax obligaons eciently by seng up an online account with the IRS. This secure plaorm allows you to access your tax records, make payments, and receive important updates. Create your account here. MAINTAINING TAX RECORDS Proper documentaon not only eases the tax preparaon process but also ensures you are well-equipped to address any inquiries from the IRS or other enes. Below are some key guidelines and recommendaons for eecve record-keeping.
33 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. IRS Rules on Tax Record Retenon: • General Rule: The IRS suggests taxpayers retain their led tax returns and accompanying documentaon for at least three years from the ling date or the return's due date, whichever comes later. • Underreported Income: If your reported income is understated by more than 25% of the actual gross income presented in your return, the IRS can audit for six years, thus we recommend keeping records for 7 years. • No Returns Filed: In cases where a return wasn't led, it's prudent to hold onto records indenitely. • Claim for Loss from Worthless Securies: In such situaons, retain your records for a span of seven years. • Special Consideraons: Always be mindful that the IRS guidelines serve as a foundaon, and specic scenarios like claims for tax credits or refunds may demand parcular documents. Addionally, individual states might impose their own record retenon rules, which can somemes deviate from the federal criteria. • More comprehensive guide on record retenon here. General Recommendaons for Eecve Record Keeping: • Digital Records: To bolster the security and accessibility of your tax documentaon, consider maintaining digital backups. This measure oers protecon against potenal physical damages. • Organized Storage: Keep your records in a systemac manner—either chronologically or categorically—to facilitate smooth retrieval when necessary. • Non-Tax Purposes: Remember, enes beyond the IRS, such as creditors or insurance rms, might necessitate longer retenon of certain nancial records. Always factor in these specicaons when determining the duraon for preserving specic records. AVOIDING SCAMS Every year, countless taxpayers become vicms of sophiscated scams that compromise their personal informaon and nancial safety. The IRS, in its ongoing commitment to the safety of taxpayers, constantly updates and informs the public about the latest taccs employed by scammers. IRS Dirty Dozen List here. IDENTITY PROTECTION PIN (IP PIN) An IP PIN is a unique six-digit number that replaces an individual's social security number on their tax return, oering an added layer of protecon against identy the. Inially designed for identy the vicms, starng in 2021, any individual can opt into the IP PIN program. However, Jump to Table of Contents
34 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. obtaining an IP PIN requires passing a stringent identy vericaon process. This protecon also extends to spouses and dependents who meet the identy vericaon criteria. We must have your IP PIN, if one has been issued, in order to e-le your tax return. To secure an IP PIN or to learn more, individuals are encouraged to use the Get an IP PIN tool online. Remember, an IP PIN is valid for only one year, necessitang annual renewal. A comprehensive guide on this topic here. ADDITIONAL RESOURCES Where’s My Refund (IRS) Tax Withholding Esmator Where’s My Refund (NC) Online IRS Payments Online North Carolina Payments: Original Tax Due Amended Tax Due Extension Payments Esmated Payments Crypto Tracking/Tax Soware: CoinTracker CoinLedger Koinly ZenLedger CLOSING COMMENTS DMJPS wishes to express our deepest gratude for the opportunity to assist you with your tax-related needs. Please note that the insights shared in this leer are intended to provide a broad overview and are not to be construed as specic advice tailored to your unique situaon. Every individual's nancial and tax circumstances are disnct, and we recommend consulng with us at DMJPS for a comprehensive analysis of your tax situaon before making any decisions. If you have quesons or need more info, please don't hesitate to contact us. Proacve updates. With the constant changes in today’s tax law, it is important to maintain a thorough knowledge of the most current developments. We provide clients with proacve updates, such as monthly newsleers, to keep you up-to-date on current issues aecng industry, personal tax, and accounng news. DMJPS Digest also highlights key consideraons for leaders with arcles and resources. We thank you for placing your trust in our services and encourage you to stay connected with us to learn more.
35 DMJPS PLLC I 888.873.2545 I dmjps.com I be greater Member of CPAmerica, Inc. You may join our mailing list by emailing connect@dmjps.com. Our priority is to ensure you are well-informed and adequately prepared to make sound nancial decisions that align with your best interests. We are here to support you. Please reach out should you have any queries or require further assistance. Here's to a prosperous and fruiul year ahead. Warm regards, DMJPS PLLC