You can now make after-tax contributions to a Simple IRA or SEP. Previously, contributions to these accounts could only be pre-tax. Employees may now also choose for their employers matching contribution to also be made on a post-tax basis. However, the employee must pay the income tax on post-tax contribution in the year it is earned.
New Statute of Limitations
Reduced Penalties for Missed RMDs
Do you have any undistributed required minimum distributions (RMDs) from prior tax years? Under previous rules, failure to distribute your full RMD could result in a 50% excise tax. Secure 2.0 Act reduces penalties for those failing to withdraw their required minimum distribution to 25%. The penalty can be further reduced to 10% by correcting your RMD within two years. You may also request to waive your penalties by filling out Form 5329 for the IRS.
New RMD Starting Ages
Starting January 1, 2023, the required minimum distribution (RMD) starting age will increase from 72 to 73. This means that if you turn 72 in 2023, you do not have to take your RMD until 2024. This allows you to benefit from another year of tax-deferred growth in your IRAs. Individuals who met previous RMD age standards must continue to take their RMDs. The RMD age will increase again to 75 in 2033.
Incorporating Cost Segregation into Your Real Estate Investment Strategy
Cost segregation is a tax-deferred strategy that allows real estate investors to accelerate depreciation and achieve immediate tax savings through the classification of appliances, carpets, and all other interior and exterior components on the property. Cost segregation could be advantageous after acquiring a new property, as an alternative to a 1031 exchange, or in cases of partial asset dispositions.
Can a 529 Plan Reimburse Myself for Last Year’s Expenses?
While there have been proposals and suggestions regarding matching 529 plan distributions with expenses in the same tax year or by March 31 of the following year, no official ruling has been made. IRS publications and tax forms do not provide explicit guidance on reimbursement withdrawal deadlines. As a result, we recommend aiming to reimburse yourself for qualified education expenses within the same year or before March 31 of the following year. If you cannot meet these deadlines, it remains uncertain whether reimbursement is still possible. We advise you to consult us to navigate this matter and make informed decisions based on your specific circumstances.
Have a Profitable Business?
If you have a profitable sole-proprietorship or partnership, then you are paying income tax and a 14% FICA tax (a.k.a. Self-Employment tax) on all of your business profit. If you convert that business to an S Corporation, then you will continue to pay income tax on all of the business profit but will pay the 14% FICA tax only on what you pay to yourself as a W-2 wage from your S Corporation (see the next idea for further details).
Do You Think You Can Make Money in Real Estate?
Buy your first property for $50K. When it is worth $80K, trade up to a better property. When that property is $110K, trade up for another property. By the time you die, you will have real estate worth $2M for which you only paid $50K. If you utilize the like-kind exchange rules when transferring between each property, then you can pass away holding the last property and the nearly $2M of taxable gain could potentially vanish upon your death. If you would rather enjoy that appreciation for your own personal use while you are still alive, then you can borrow against the $2M property in retirement and enjoy the use of the borrowed funds without selling the property and being forced to recognize a gain…and, to top it off, the gain could potentially still disappear upon your death.
Want to Start a Retirement Plan for your Employees?
The IRS will give you a tax credit to reimburse you for your retirement plan start-up expenses. You only get the credit if you have non-owner employees. Furthermore, if you automatically enroll your employees in your retirement plan, then you get a credit between $500 and $5,000 each year for the first 3 years of the retirement plan.
Do You Want 0% Capital Gains Tax on Your New Business Venture?
If you invest in a C Corporation that has less than $50M of assets in exchange for an issuance of stock and hold the stock for 5 years before selling it, then you pay no federal tax on up to the first $10M of gains you have. The business cannot be one involving personal services (such as finance, investing, farming, or operating a hotel or restaurant.) Obviously, the ability to use this rule is limited, but we find that it works well for a business involving a new invention or new technology: If you get a patent on a new product, don’t get the patent in your name, but instead form a C Corporation, have the C Corporation obtain the patent and engage in business, and then when the patent gets valuable, sell the stock of the C Corporation. By following these steps, your gain might be tax free.
Want to Buy a New or Used Electric Vehicle? New tax credit rules apply and are generally effective on purchases after 1/1/23:
a. The max credit is $7,500 per vehicle ($3,750 if the vehicle complies with domestic sourcing requirements for critical materials used in batteries plus another $3,750 if the vehicle satisfies domestic content requirements for battery components) – no vehicles currently meet the critical materials test…so the max credit currently is $3,750.
b. The final vehicle assembly always has to occur in the USA.
c. You cannot claim the credit if your personal income is more than $300K if Married Filing Joint ($150K for single-filers).
d. The MSRP cannot be more than $80K for vans, trucks, or SUVs or $55K for any other vehicles.
e. You can get a credit of the lesser of $4K or 30% of the purchase price for your used electric vehicle which costs under $25K and is at least two years old. To get this used vehicle credit, you have to purchase the used vehicle from a dealer and your income has to be less than $150K Married Filing Joint or $75K as a single-filer.
f. The above rules apply if the vehicle is for personal-use. If the vehicle is for business-use, then the rules are more liberal.
g. Before you buy an EV, give us a call so that we can walk you through the rules and opportunities.
Do You Have Losses in Your Crypto Portfolio?
Similar to your investment account, you can sell underperforming crypto or virtual currency to free-up the capital losses to offset your capital gains and up to $3K of ordinary income each year. As of now, crypto and virtual currency transactions are not subject to the Wash Sale Rules, so you can re-purchase the crypto or virtual currency moments after the sale and still get to enjoy the losses on your tax return.
Do You Have Unrealized Losses Sitting in Your Taxable Investment Account?
Put those losses to work to lower your 2022 taxes. You can sell the losers so that the realized loss is free to offset any capital gains you have and up to $3K of ordinary income to the extent you have completely offset your capital gains each year. CAUTION – be sure to avoid the Wash Sale Rules when implementing this strategy. You cannot buy/sell the same or “similar” securities within 30 days of another buy/sell and deduct any resulting losses. For example, if you sell GE (General Electric) shares on 12/15/22 at a loss, you cannot repurchase GE shares before 1/15/23. If you did, then any resulting losses from the 12/15/22 sale would be disallowed.
Are you getting subsidized health insurance through the Federal health insurance?
If you are getting subsidized health insurance through the Federal health insurance exchange then you likely can receive more subsidy due to a recent law change. In the past, you could receive NO subsidy if your income exceeded 400% of the Federal Poverty Level. Now, there is no bright-line phaseout and you will always receive a subsidy to keep you from paying more than 8.5% of your income towards health insurance. If you need any clarification on how this impacts your tax return then please call us.
Don’t Overpay Tax on Early Retirement Distributions
If you have to get your hands on IRA or 401K money before age 59 ½, then usually you have to pay a 10% penalty. You might be able to avoid this penalty if your withdrawal is to pay for large medical bills, college expenses, the birth or adoption of a child, a first-time home purchase (withdrawal limited to $10K), or is related to a disability. Furthermore, some of these exceptions only apply to IRA withdrawals. For example, if you are purchasing your first home, a $10K withdrawal from your 401K to fund it will be subject to a 10% penalty, but a $10K withdrawal from an IRA won’t be. Solution: Roll $10K of funds from your 401K to your IRA, and then withdraw the funds from the IRA to help with your house down payment.