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Mid-year Tax Planning

By Contributor
Accounting and Tax Planning Special Coverage

With Legislation Stalled, 2024 Sees Few Changes

By Kristina D. Houghton, CPA

 

After overwhelming approval by the House Ways and Means Committee on Jan. 19, the Tax Relief for American Families and Workers Act of 2024 was sent to the House under rules that would limit the ability to amend the text but would require approval by two-thirds of the chamber.

After a delay caused by a minor revolt of some GOP members who were trying to get an increase in the state and local tax deduction limit added to the bill as well as modifications of the child tax credit, an agreement was made to consider those in a separate bill in the near future, so the legislation passed by the House is the same version that was passed out of committee.

The bill provides for increases in the child tax credit, delays the requirement to deduct research and experimentation expenditures over a five-year period, reinstates the depreciation and amortization add-back through 2025 for purposes of calculating the business interest limitation, extends the 100% bonus depreciation through 2025, and increases the Code Sec. 179 deduction limitation, among other business-friendly provisions.

“Standard deduction amounts for 2024 have been inflation-adjusted and are higher than they were last year.”

Unfortunately, the Senate never addressed the bill. Due to the large number of provisions that are retroactively applicable to the 2023 tax year, and in some cases even earlier, the original hope was to get the bill passed before the start of the 2024 filing season. Since that deadline has passed, the goal is still to get the bill passed as soon as possible to minimize the administrative burdens on the IRS. There is no current date set for a Senate vote, and with this being an election year, the likelihood is slim.

As a result, planning for 2024 will not be much different than 2023, but let’s summarize the few changes, primarily inflation-related adjustments, effective for 2024. Pay attention to these changes because they can hurt or help your bottom line. Use this information now so you can hold on to more of your hard-earned money when it’s time to file your 2024 federal income tax return in early 2025.

 

Individual Tax Changes

Retirement Savings

Key dollar limits on workplace retirement plans and IRAs increase in 2024. The maximum 401(k) contribution is $23,000. People born before 1975 can contribute an extra $7,500. These limits also apply to 403(b) and 457 plans.

SIMPLEs have a $16,000 cap, plus $3,500 for individuals age 50 and older.

The 2024 contribution cap for traditional IRAs and Roth IRAs is $7,000, plus $1,000 as an additional catch-up contribution for individuals age 50 and older.

The income ceilings on Roth IRA pay-ins are higher for 2024. Contributions phase out at adjusted gross incomes of $230,000 to $240,000 for joint filers and $146,000 to $161,000 for single filers.

2024 deduction phaseouts for traditional IRAs range from adjusted gross incomes of $123,000 to $143,000 for joint filers covered by 401(k) plans and $77,000 to $87,000 for single filers and heads of household. If only one spouse is covered by the plan, the phaseout range for deducting pay-ins for the uncovered spouse is $230,000 to $240,000.

 

Adoption Tax Credit

The adoption credit is taken on up to $16,810 of qualified expenses in 2024. The full credit is available for a special-needs adoption even if it costs less. The credit phases out for filers with modified AGIs over $252,150 and ends at $292,150.

 

Standard Deduction

Standard deduction amounts for 2024 have been inflation-adjusted and are higher than they were last year.

The income-tax brackets for individuals are much wider for 2024 because of inflation during the 2023 fiscal year. Tax rates are unchanged.

 

Capital Gains and Qualified Dividends

The favorable tax rates on long-term capital gains and qualified dividends do not change. But the income thresholds to qualify for the various rates go up for 2024. The 0% tax rate applies at taxable incomes up to $94,050 for joint filers, $63,000 for heads of household, and $47,025 for single filers. The 20% tax rate starts at $583,751 for joint filers, $551,351 for heads of household, and $518,901 for single filers. The 15% tax rate is for filers with taxable incomes between the 0% and 20% break point.

The annual gift tax exclusion for 2024 is $18,000 per donee. That means in 2024, you can gift up to $18,000 ($36,000 if your spouse agrees) to each child, grandchild, or any other person without having to file a gift-tax return or tap your lifetime estate and gift tax exemption. Annual gifts over the exclusion amount will trigger filing of a gift tax return for 2024, but no gift tax will be due unless your total lifetime gifts exceed $13,610,000.

 

Business Tax Changes

Depreciation

First-year bonus depreciation isn’t as valuable in 2024. Last year, businesses could deduct 80% of the cost of new and used qualifying business assets with lives of 20 years or less. This year, the 80% writeoff decreases to 60%.

However, Section 179 expensing is higher. $1,220,000 of assets can be expensed in 2024. This limit phases out dollar for dollar once more than $3,050,000 of assets are put into use in 2024.

Note that the amount of business assets expensed can’t exceed the business’s taxable income. Bonus depreciation doesn’t have this rule.

 

Pass-through Income

A key dollar threshold on the 20% deduction for pass-through income rises in 2024. Self-employed individuals and owners of LLCs, S-corporations and other pass-throughs can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes of more than $383,900 for joint filers and $191,950 for all others.

 

Conclusion

It is difficult to do tax planning in anticipation of what might happen in Washington, especially with this being an election year and the great divide on tax policy between the parties. Maybe the best planning would be to plan for possible tax changes in 2025 depending not only on the party that wins the presidential election, but also on the mark-up of the House and the Senate.

It could well be time to accelerate gifting, accelerate income, and postpone deductions. Perhaps with optimism, you can imagine that those postponed R&D and interest deductions will give you a deduction at a higher tax rate, and maybe this can lessen the pain of accepting possible increased tax rates.

Finally, remember that this article is intended to serve only as a general guideline. Your personal circumstances will likely require careful examination and should be discussed with your tax adviser.

 

Kristina D. Houghton, CPA is a partner at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.

Mid-year Tax Planning

By Contributor
Accounting and Tax Planning Special Coverage

Strategic Decisions Now Can Benefit You in the Long Run

It’s late June — time for, among things, thinking about your taxes. Actually, it’s time to do more than think about them. What’s needed is a hard look at matters ranging from business classification to expiring provisions to charitable donations, and then formulating strategies that will benefit you and your business for the long term.

By Kristina Drzal Houghton, CPA

Accountants spend a lot of time talking to clients during tax season about the importance of tax planning. Now is that crucial time. As we approach the halfway point of 2022, tax planning discussions should be underway for many businesses and individual taxpayers

Starting early is important but plans should consider that tax rules might change at the end of the year and businesses and individuals simply can’t afford to not prepare for those changes. Additionally, some COVID-19 relief programs are set to expire this year, therefore businesses should be ready to document appropriately and/or take advantage of potential savings. With so much probable change, it’s important to carefully consider your options and make strategic decisions that could benefit you in the long run.

As a small business owner, tax planning should be a key part of your overall financial strategy. By taking advantage of tax breaks and deductions, you can minimize your tax liability and keep more money in your pocket. Here are nine strategies you should consider:

 

Review your tax liability for the current year

EventTake a look at your tax situation for the current year and estimate how much tax you will owe. This will help you determine if you need to make any changes to your withholdings or estimated tax payments.Event

Consider a tax status changeEventYour entity type not only impacts how you are protected under the law but it also affects how you are taxed. If you’ve outgrown your current business structure, or if you previously set up a structure that wasn’t the best fit for your business, you can elect to change your structure. Each entity type has its own benefits and drawbacks, so it is important to make sure you have a full picture before committing to your decision.

 

Amortization of research and experimental (R&E) expenditures

Due to law changes, companies are no longer allowed to fully deduct their R&E expenses. Instead, these expenses are amortized over a period, based on where their services are provided. Classification of expenses as R&E should be renewed.Event

 

Review expired provisions

Some of the tax relief provisions in 2021 the American Rescue Plan Act (ARPA) were carried over into 2022 by the Build Back Better Act. Principal among them are ARPA’s increases and expansion of the child tax credit, including its monthly advance payments, which have now ended as of the December 2021 payment. The Build Back Better Act was signed into law this past March 11 and included a renewal of that provision for 2022. Beyond those expiring provisions, a number of pre-ARPA “extender” items lapsed at the end of 2021, such as the treatment of premiums for certain qualified mortgage insurance as qualified residence interest and multiple energy and fuel credits.Event

 

Review the new limit on state and local tax deductions

For individual taxpayers, one of the biggest potential changes being lobbied is the possible restoration of the deduction for state and local taxes (SALT). If this proposal becomes law, it could have a major impact on your tax bill. As such, it’s important to think about how you would adjust your tax planning if the SALT deduction is restored or remains limited. Additionally, there are a number of other proposed changes to the tax code that could impact individuals, so it’s important to stay up-to-date on the latest developments and plan accordingly.Event

 

Consider the Qualified Business Income (QBI) Deduction

The qualified business income (QBI) deduction, which provides pass-through business owners a deduction worth up to 20% of their share of the business’s qualified income. However, this deduction is subject to a number of rules and limitations. For example, owners of specified service trades or businesses (SSTBs) are not eligible for the deduction if their income is too high. SSTBs generally include any service-based business, such as a law firm or medical practice, where the business depends on its employees’ or owners’ reputation or skill. If a business is eligible for a QBI deduction, owners should carefully weigh salary vs. flow through income.Event

 

Budget for larger charitable donations

Finally, if you’re thinking of making a charitable donation, recently you may not have benefited as much from the deduction for your donation as you have in the past. Since the TCJA nearly doubled the standard deduction started effective 2018 and capped the SALT deduction, fewer people itemize their deductions on their tax return.

As a result, the tax benefits of charitable donations have been limited to those who itemize their deductions. If the SALT cap is increased or eliminated, the deduction for charitable contributions could be more beneficial. If you are considering more significant contributions, gifting appreciated stuck to qualified charities offers great benefits. You will get a tax deduction for the fair market value and not be taxed on the unrealized gain. Event

 

Remember, meals and entertainment are still 100% deductible.

For 2021 and 2022 only, businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. (The limit is usually 50% of the cost.)

 

Review your accounting methods and records

It’s a great time to look at the books, and make a plan to adjust anything that should be changed while also planning for the future. Many times, unexpected changes come up that can impact your business and individual taxes that you may not have even considered. For example, will you have any major life changes, such as getting married or having a baby? Buying a house? Leasing a business vehicle? Hiring more employees? Relocating your business? Spending more than usual on talent acquisition? Investing or accepting cryptocurrency? These changes can have a significant impact on your tax liability.

 

No matter what changes are ultimately enacted into law, the key to successful tax planning is staying informed and being proactive. By taking the time to understand the potential implications of proposed changes and making strategic decisions now, you can help ensure a smooth tax season for yourself and your business in 2022.

 

Kris Drzal Houghton is a partner at the Holyoke based accounting firm, Meyers Brothers Kalicka, P.C. 

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