Russell W. Hall, CFP®

I recently attended the first in a master class series on tax planning.  The host, industry expert Debra Taylor, says our current situation in the US is “tax chaos”.  She’s referring to the fact that some form of tax legislation has been passed almost every year since 2017, with the changes from Congress seeming to come faster and more furious than they have previously.  But as Taylor also pointed out, with that chaos comes opportunity! 

We recently wrote on some of the tax law changes that came with the Secure 2.0 Act (linked here), but there are a couple of additional items that we’ll cover here, along with regular updates for tax year 2023. 

We also want to note that for our clients in most of the counties in California, there is an automatic disaster extension to file and pay Federal and California tax obligations until October 16.  Taxpayers do not have to be directly affected by the winter storms, just live in one of the counties listed by the IRS (all except Imperial, Kern, Lassen, Modoc, Plumas, Shasta, and Sierra). 

Tax Rates and Deductions

The rates on tax brackets haven’t changed, still ranging from 10% to 37%.  Income thresholds were increased with higher cost-of-living adjustments, so if your income remains the same as it was in 2022, you’ll pay a bit less in taxes.

The standard deduction for married filing jointly filers increases to $27,700, with that being $1,500 higher for each taxpayer over 65 or blind.  Single filers had the deduction increase to $13,850 (plus $1,850 if over 65 or blind).

Many of our clients have been switching to filing standard deduction in the last several years, as their deductions are no longer large enough to itemize.  In that scenario, we recommend examining deductions to see if any can be “bunched” (combining multiple years of deductions into one year) or handled in other ways (gifting from IRA accounts).

Retirement Account Contributions

IRA and Roth IRA contribution limits have increased to $6,500, or $7,500 for taxpayers age 50 and over.  Roth IRA contributions are limited for taxpayers with an income greater than $138,000 (single) or $218,000 (married filing jointly), and fully phased out at $153,000/$228,000.

IRA contributions are fully deductible when an individual is not covered by an employer’s retirement plan, regardless of income.  When covered by an employer’s plan, IRA contributions are limited with an income greater than $73,000 (single), $136,000 (married filing jointly – covered spouse making contribution), or $218,000 (married filing jointly – non-covered spouse making contribution).

For other retirement plans like 401(k), 403(b), and 457 retirement plans, participants may make elective salary deferrals of up to $22,500. Those age 50 and over can add an additional $7,500, for a total of $30,000.

Participants in SIMPLE IRA and SIMPLE 401k retirement plans may make elective salary deferrals of up to $15,500 ($19,000 if age 50 and over).

The total limit on annual additions to defined contribution retirement plans was increased to $66,000.

We usually encourage clients who are able to save the maximum amount to their retirement account to do so. 

Capital Gains

Long-term capital gains tax rates have not changed, but as usual the tax brackets have been updated:

Higher income amounts than those shown will result in a 20% capital gains rate.  There is also an additional 3.8% Medicare tax on gains for those with income over $200,000 (single) or $250,000 (married filing jointly).

Gift and Estate Tax

The annual gift exclusion is now $17,000, so gifts up to that amount can be made to any person without needing to file a gift tax return.  The total gift and estate tax exclusion increased to $12,920,000, with the estate tax rate still at 40% for amounts above that.

Along with other provisions, the higher gift/estate tax limits are set to drop by about half in 2026.  We have been discussing strategies with clients who could potentially be affected by those changes, so let us know if you’d like to talk that over.

Social Security and Medicare

For taxpayers who are still working, compensation of up to $160,200 is subject to FICA taxes for Social Security.

For those age 62-66/67 who are still working and receiving Social Security benefits ages 62–66, an earnings test is applied. The maximum amount one can earn without having benefits reduced is $21,240.  After that, the benefit is reduced by $1 for every $2 of earned income.

Medicare Part B premiums are set based on income from two years in the past (i.e., 2023 rates are based on the 2021 tax return).  Taxpayers with income greater than $91,000 (single) or $182,000 (married filing jointly) are charged higher premiums.  This is known as IRMAA - Income-Related Monthly Adjusted Amount – and it can really take some people by surprise, especially if their income is higher than usual for just one year.

More from Secure 2.0 Act

Many of our clients take advantage of Qualified Charitable Distributions (QCDs) from their IRA accounts.  The maximum annual QCD donation has been $100,000 for a while, but starting in 2024 that limit will be linked to inflation instead. 

Another change is that previously QCDs could only go directly to a 501(c)3 charity and not to any other type of charitable entity.  That is still mostly true – you cannot send QCDs to a private foundation or donor-advised fund.  However, there is now a one-time opportunity to direct a QCD donation of up to $50,000 into a “split-interest” entity like a charitable remainder trust or charitable annuity arrangement. 

Those vehicles can be complicated and are beyond the scope of this article, but in general they offer the ability to pass money to a charity while receiving some kind of payment back.  That can allow deferral on income from an IRA that otherwise would have been immediately taxable.  That said, we think this is a provision with limited appeal, especially with the relatively low limit of $50,000.

One more interesting provision – seemingly out of left field – covers 529 college savings accounts that have been open for 15 years or longer. Starting in 2024, 529 account owners can transfer unused account balances to a Roth IRA in the name of the beneficiary.  There’s no income limit as there would be with regular Roth IRA contributions, but of course there are several caveats.  The rollover must be from money that wasn’t contributed in the last five years, the annual transfer limit is the IRA contribution limit for the year, and a maximum of $35,000 can be moved to the Roth. 

This also probably has limited appeal, since given the high cost of college most 529 accounts will likely be depleted by the time the beneficiary graduates.  There is also a great deal of flexibility built into 529s, with the ability to change the beneficiary to other family members or even to the account owner.  Still, we can see it being a valuable strategy in some situations where there’s “leftover” money in a 529 account.

If you have any questions regarding tax planning, schedule a 15-minute discovery call with a fee-only financial advisor.