Tax Strategy: Year-end 2023 tax planning

October 25, 2023 1:26 PM

Congress is still trying to figure out how to agree on appropriations under a budget for fiscal year 2024, which began on Oct. 1, 2023. If agreement is reached, some tax provisions could be included. Some of those being discussed include extending the individual tax provisions from the Tax Cuts and Jobs Act, currently scheduled to expire at the end of 2025; restoring the 100% deduction for research expenses; restoring the enhanced Child Tax Credit; and increasing or eliminating the limit on state and local tax deductions. It is not clear that agreement can be reached on any of this.

In spite of the lack of new tax legislation so far this year, taxpayers and their tax return preparers should have plenty to focus their attention on in preparing 2023 tax returns. It should not be as difficult a year as some of the COVID years involving economic impact payments and advance Child Tax Credit payments. The issues with the Employee Retention Credit, however, remain a lasting vestige of some of the COVID-related tax problems.

2022 tax legislation

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Although no significant tax legislation has been enacted in 2023, several pieces of tax legislation from 2022 tax legislation will have an impact on 2023 tax returns.

The Inflation Reduction Act provided new or enhanced tax credits and deductions for individuals and businesses. For individuals, the two tax credits for energy-efficient home improvements were enhanced and extended. Changing the Energy Efficient Home Improvement Credit from a $500 lifetime credit to a $1,200 annual credit will make that credit available again for many homeowners for whom it had otherwise been used up.

The expanded Clean Vehicle Credit and new Previously Owned Clean Vehicle Credit are likely to promote the sale of electric vehicles. However, the sourcing rules and assembly rules for the new credits means that many electric vehicles will not qualify or will qualify for only a partial credit until assembly plants are located in North America and battery components are sourced from the U.S. or countries with which the U.S. has a free-trade agreement. More types of used clean vehicles may qualify for that previously owned credit than qualify for the new vehicle credit. Changes to the Alternative Fuel Vehicle Refueling Property Credit limiting the credit to rural and lower-income areas may reduce the availability of that credit for many households.

For businesses, 16 new or expanded clean energy credits and deductions represent the most significant tax breaks ever made available for clean energy. The credits tend to focus increasingly on the resulting clean energy produced, rather than the particular source of the clean energy. Prevailing wage and apprenticeship requirements apply for obtaining the maximum amount for many of the tax breaks. Many of the credits in the future can be transferred to an entity better able to utilize the credits, and nontaxable entities such as not-for-profits, tribal entities and government entities may qualify for elective payments rather than a credit.

The CHIPS legislation provides incentives for domestic production of microchips that has already resulted in new domestic construction of microchip manufacturing facilities.

SECURE 2.0, enacted as part of the year-end Appropriations Act in December 2022, made many changes to tax-advantaged retirement plans, including extending the age for required minimum distributions to age 73 for 2023 and reducing the penalties for failure to make required minimum distributions. An IRS position that the 10-year distribution period for inherited IRAs must be made ratably over the 10-year period caught many taxpayers and tax practitioners by surprise.

The IRS has responded by waiving penalties for failure to make required minimum distributions from inherited IRAs in 2021, 2022 and 2023 for IRA owners who died in 2020, 2021 or 2022. Automatic enrollment is required beginning in 2024. Maximizing retirement plan contributions remains a good year-end tax strategy, although IRA and Roth IRA contributions may be made up until April 15, 2024.

SALT deduction limit

Even if Congress does not eliminate the limit on state and local tax deductions, over half of the states, with the apparent blessing of the Supreme Court, have enacted legislation that permits a full deduction of state and local taxes if paid by a pass-through entity. The state changes have focused on partnerships and S corporations. Each state statute is a little different, and guidance can sometimes be limited, so care must be taken in seeking the deduction.

The Moore case

The U.S. Supreme Court building stands in Washington, D.C., U.S., on Tuesday, Feb. 25, 2020. President Donald Trump demanded that Supreme Court Justices Sonia Sotomayor and Ruth Bader Ginsburg recuse themselves from future cases involving his administration after a dissent from a decision allowing the government to test prospective immigrants' wealth.

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The Supreme Court is scheduled to review this term a lower court decision in Moore that found unconstitutional the tax on unexpatriated overseas earnings. Many commentators have suggested that taxpayers who have made such payments for open years should consider filing protective refund claims in the event the Supreme Court agrees with the lower court.

The Employee Retention Credit

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The IRS has been overwhelmed with claims for the Employee Retention Credit from the COVID years and has announced that it has placed a moratorium on processing further claims for the credit through at least Dec. 31, 2023, until it can process its backlog of claims and try to identify what it considers to be improper claims for the credit.

Charitable contributions

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The deduction of charitable contributions by nonitemizers has expired along with the enhanced deduction of itemized charitable contributions. However, considering charitable contributions for the year remains a viable tax strategy for itemizers, including bunching strategies in which charitable contributions are bunched into every other year in order to exceed the standard deduction in the year that charitable deductions are claimed. Donor-advised funds can assist in the strategy by making it easier to spread out the actual contribution to a particular charity. Donating appreciated stock continues to be a viable strategy for avoiding tax on the appreciated amount.

Qualified charitable distributions from IRAs are available for taxpayers age 70 ½ or older up to $100,000 per year. This removes the distribution from adjusted gross income. A new law change also permits a one-time distribution of up to $50,000 of the qualified charitable distribution to a dual beneficiary trust, such as a charitable remainder trust. The annual gift tax exclusion is $17,000 for 2023.

Estate planning

Estate plan, living will and trust documents

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One concern of the pending elimination of the individual tax breaks in the Tax Cuts and Jobs Act after 2025 is the drop of the unified credit from $12.92 million per individual for 2023 to a figure around $7 million, depending on inflation adjustments, in 2026. Taxpayers concerned about the drop in the unified credit may be considering making sizable gifts in 2023, 2024 and 2025. The IRS has assured taxpayers such gifts made under the current unified credit will not be clawed back into the estate if the unified credit is eventually reduced.

1099s

Taxpayers should anticipate receiving more 1099s for the current year. Third-party payment processors are now required to provide 1099-Ks to individuals who have more than $600 worth of transactions with the processor for the year. The processor may not know whether the transaction is a personal transaction or a transaction for goods or services that is taxable. The taxpayer is advised to try to notify the processor that a transaction is a personal one. If 1099-Ks are received for personal items, the taxpayer is advised to report the incorrect amount on the 1099-Ks on Form 1040 Schedule 1 Part I, Line 8z and the adjustment on Schedule 1 Part II, Line 24z. Taxpayers may also receive a Form 1099-Misc from the seller and a 1099-K from the third-party processor for the same transaction, and should be careful not to double-count the amounts on the tax return.

Tax loss harvesting

Tax loss harvesting remains a viable strategy for year-end tax planning. Taxpayers should be alert to the wash sale rules to avoid loss of the current capital loss deduction. Taxpayers investing in mutual funds should also be alert to the record date for the fund for year-end capital gain distributions to avoid buying into the fund just before the record date.

Digital assets

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The IRS continues to focus on underreporting of digital asset income. As crypto transactions continue to evolve with more complexity, the IRS has struggled to keep up with guidance, and litigation has resulted from the IRS's attempts to tax certain transactions.

The IRS was able to avoid a possible adverse ruling on its position by paying a refund to a litigating taxpayer to get the case declared moot and then promulgating guidance stating that such transactions are taxable.

The service continues to have success in gaining access to information on crypto transactions through third-party summonses, so taxpayers should take increasing care in their response to the digital asset question on Form 1040 and to their reporting of transactions in digital assets. The IRS continues to take the position that digital assets are property and not currency, in spite of some countries adopting cryptocurrency as an official currency.