With the election behind us and the holiday season in full swing, you may not be thinking about taxes. But you still have time to take proactive steps to reduce your federal income tax liability for 2024. Here are five last-minute tax planning strategies to consider before year end.
Important: Many Tax Cuts and Jobs Act (TCJA) provisions that affect individuals — such as the doubled standard deduction and lower individual tax rates — are scheduled to expire at the end of 2025, absent congressional action. However, Republican control of the White House and Congress makes an extension or even an expansion of many TCJA provisions likely.
1. Timing Income and Expenses
Suppose you don’t expect to be in a higher tax bracket next year. In that case, the traditional tax reduction strategy is to defer taxable income into the next year and accelerate deductible expenses into the current year. For example, you could ask your employer to pay your bonus in January, and you can prepay deductible January expenses before year end.
This strategy will reduce your taxable income, which also positions you to make the most of tax breaks that phase out based on income. Examples include the IRA contribution deduction, child tax credits and education tax credits.
Deferring income can also help high-income individuals avoid or minimize the 3.8% net investment income tax (NIIT). The NIIT kicks in at the following modified adjusted gross income (MAGI) levels:
$200,000 for single and head-of-household filers,
$250,000 for married couples who file jointly, and
$125,000 for married couples who file separately.
However, if you expect to be in a higher tax bracket in 2025, you might want to consider the reverse strategy. This might be the case if you switch to a higher-paying job, start a side business, or plan to sell your business or significant investments for a gain in 2025. In these situations, it might make more sense to accelerate taxable income into the current year and defer deductible expenses in the next tax year. Maximizing tax income for 2024 will allow more income to be taxed at your current year’s lower rate. And deferring expenses will make the deductions more valuable, because deductions save more tax when you’re subject to a higher tax rate.
2. Bunching Itemized Deductions
The TCJA nearly doubled the standard deduction, causing fewer people to itemize deductions. For 2024, the inflation-adjusted standard deductions are:
$14,600 for single filers and married couples who file separately,
$21,900 for heads of households, and
$29,200 for married couples who file jointly.
If you’re near the cutoff for itemizing deductions for 2024, you can “bunch” certain expenses to qualify for itemized deductions. This refers to timing deductible expenses to exceed the standard deduction threshold in a specific tax year. Such expenses include:
Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI),
Mortgage interest,
Investment interest,
State and local taxes,
Casualty and theft losses from a federally declared disaster, and
Charitable contributions.
For instance, before the end of the year, you could schedule elective medical or dental procedures with uninsured costs, prepay property taxes due next year, and make charitable contributions for both 2024 and 2025.
Important: Under the TCJA, itemized deductions for state and local taxes are limited to $10,000 annually. Absent congressional action, this limit is scheduled to expire after 2025. During the campaign, President-Elect Donald Trump proposed increasing or eliminating it.
3. Leveraging Charitable Giving
Regular donations of cash or personal property aren’t the only way charitable giving can help you trim your tax bill. There are other options to boost itemized deductions for charitable contributions. For example, consider donating appreciated assets you’ve held for at least one year. This allows you to avoid capital gains tax and, if applicable, the NIIT on the appreciation. Plus, you can deduct the fair market value of donated stocks and the cost basis of nonstock donations (subject to AGI limits).
A qualified charitable distribution (QCD) won’t count toward your charitable contribution deduction, but it’s still worth considering. After age 70½, you can make a QCD of up to $105,000 for 2024 from a retirement account with required minimum distributions (RMDs). The distribution is treated as an RMD from the account and is excluded from your taxable income. For 2024, you also can make a one-time QCD of up to $53,000 to a “split-interest” entity, meaning a charitable gift annuity or a charitable remainder trust. (Both QCD limits are adjusted annually for inflation.)
4. Converting Traditional IRAs to Roth IRAs
Despite a strong stock market in 2024, executing a Roth conversion is still advisable, especially if you expect continued appreciation in the future. The main downside is that you must pay income taxes now on the converted amount. A conversion can also result in a higher taxable income for the year of the conversion, which can affect tax breaks that phase out based on AGI or MAGI.
However, the long-term benefits often outweigh the tax costs. Roth IRAs don’t come with RMD obligations, and the funds appreciate tax-free. Qualified Roth IRA withdrawals are also federal-income-tax-free. A qualified Roth withdrawal is one taken after meeting two requirements:
1. You’ve had at least one Roth IRA open for over five years, and
2. You’ve reached age 59½, become disabled or died.
This can be particularly advantageous if you’ll be subject to higher tax rates in retirement — a development that surprises many retirees. You can also withdraw funds from a Roth account for the following purposes without incurring taxes or penalties:
A first-time home purchase (subject to a $10,000 limit),
Qualified birth or adoption expenses (subject to a $5,000 limit), and
Qualified higher education expenses (with no limit).
Additionally, Roth IRAs can be a beneficial estate planning tool. Why? Because you’re not required to take RMDs, you can leave the account untouched during your lifetime and then pass on the accumulated balance to your heirs. When you die, your account beneficiary (or beneficiaries) must follow the same RMD rules that apply to inherited traditional IRAs.
5. Maximizing Retirement and Health Account Contributions
In general, it’s advisable to contribute as much as you can afford toward retirement accounts and health savings accounts (HSAs). HSAs allow people with high-deductible health plans to pay for their medical expenses with pretax dollars. The write-off for HSA contributions is an “above-the-line” deduction, so you can claim it even if you don’t itemize. In addition, the HSA contribution privilege isn’t tied to your income level. Unlike flexible spending accounts, undistributed HSA balances aren’t forfeited at year end. They can accumulate value, year after year. So, if you stay healthy and take minimal or no distributions, an HSA can function like a traditional IRA.
For 2024, the maximum contributions are:
$23,000 to 401(k) plans ($30,500 for those age 50 or older),
$7,000 to traditional IRAs ($8,000 for those age 50 or older),
$4,150 to HSAs for individual coverage ($5,150 for those age 55 or older), and
$8,300 to HSAs for family coverage ($9,300 for those age 55 or older).
Adding to these accounts reduces your taxable income for the current year and provides funds for later in life.
Important: The deadline for making 2024 contributions to 401(k)s is December 31, 2024. However, the deadline for making 2024 contributions to traditional IRAs and HSAs is April 15, 2025.
What’s Right for Your Situation?
During the 2024 election season, Republicans campaigned on promises of extending the individual tax breaks provided under the TCJA — and potentially cutting taxes even further. With the TCJA expiration date fast approaching, Congress is expected to begin deliberating on tax legislation in early 2025. However, the exact timing of when new tax laws could be introduced and enacted will depend on the legislative agenda set by congressional leaders and the Trump administration, as well as the complexities involved in negotiating and drafting comprehensive tax reforms.
We keep you updated on any law changes. Contact your tax advisor for more information on these and other federal (and state) tax planning moves that may apply to your current situation.
As the holiday season approaches, the IRS and its Security Summit partners issued a timely warning to taxpayers, with a special emphasis on employers and payroll professionals, about the increased risk of scams and identity theft. This alert comes as part of the ninth annual National Tax Security Awareness Week, highlighting the need for vigilance in protecting sensitive personal and financial information. ( IR 2024-300 , 12/2/2024)
If you own a successful small business with no employees, you might be ready to set up a retirement plan. Or you might want to upgrade from a more-basic SIMPLE IRA or Simplified Employee Pension (SEP) plan. Here are two options — solo 401(k)s and defined benefit pension plans — to consider if you have healthy self-employment income and want to contribute substantial amounts to your retirement nest egg.
Important: This article is geared toward self-employed individuals. That includes sole proprietors, partners, owners of single-member limited liability companies (LLCs) that are treated as sole proprietorships for tax purposes and members of multi-member LLCs that are treated as partnerships for tax purposes.
Solo 401(k) Plans
With a solo 401(k) plan, you can potentially make large annual deductible contributions to your retirement account. However, that advantage comes with some administrative complexity.
Click here to learn the maximum contribution amount allowed for this year, as well as the “catch-up” contribution amount for those over age 50.
On top of your elective deferral contribution, an additional contribution of up to 20% of your net SE income is permitted for solo 401(k)s. This additional pay-in is called an “employer contribution,” though there’s technically no employer when you’re self-employed. For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.
For the 2025 tax year, the combined elective deferral and employer contributions can’t exceed:
$70,000 ($77,500 if you’ll be 50 or older as of December 31, 2025), or
100% of your net SE income.
Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50% of self-employment tax attributable to the business. For further information, see “How Much Can You Contribute to a Solo 401(k)?” at right.
Besides the ability to make large annual deductible contributions, another key advantage of solo 401(k) plans is that contributions are completely discretionary. When cash is tight, you can contribute a small amount or nothing. In years when you’re flush with cash, you can contribute the maximum allowable amount.
In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it (which you should insist on). The maximum loan amount is 50% of the account balance or $50,000, whichever is less. Some other retirement plan options, including SEPs, don’t allow loans.
The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging for how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your solo 401(k) account balance exceeds $250,000, you must file Form 5500-EZ with the IRS each year. Fortunately, your tax and financial advisors can help you set up and operate the plan.
If your business has one or more employees, you obviously can’t have a solo 401(k). Instead, you’ll have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.
To take advantage of this exclusion rule, consider the feasibility of employing only younger and/or part-time workers. That way, you’ll effectively operate a solo 401(k).
Bottom line: For a one-person business, a solo 401(k) can be a smart tax-favored retirement plan choice if:
You want to make large annual deductible contributions and have the cash to do so,
You have substantial net SE income, and
You’re 50 or older and can, therefore, take advantage of the extra catch-up elective deferral contribution.
Before you jump on the solo 401(k) bandwagon, however, weigh the pros and cons of a defined benefit pension plan — especially if you’re 50 or older.
Defined Benefit Pension Plans
A defined benefit pension plan is designed to deliver a target level of annual payouts from your account after you reach a stipulated retirement age. You make annual deductible contributions, which must be calculated by an actuary, to fund target payouts.
Target payouts can be based on a fixed percentage of your average net SE income over a stipulated time period, a flat monthly dollar amount or a formula based on years of service. For the 2025 tax year, allowable contributions must be based on an annual target payout that can’t exceed $280,000 (up from $275,000 in 2024). A defined benefit pension plan can potentially allow large annual deductible contributions to fund generous retirement age payouts — resulting in large annual tax savings, especially if you’re 50 or over.
Making large annual tax-saving contributions might sound like a great idea, but not everyone has tons of cash available to cover big contributions. Plus, once your plan is set up, actuarially determined annual contributions are mandatory. In contrast, contributions to other types of plans are discretionary.
It’s also important to point out that defined benefit pension plans must generally cover your employees, too. However, the plan can include vesting and exclusion provisions to help prevent briefly employed workers from leaving with employer contributions.
Additionally, defined benefit plans are complicated. They generally require a customized plan document, along with annual actuarial calculations to determine how much to contribute each year. Your financial and tax advisors can help you crunch the numbers or locate a specialist who can help operate your pension at an affordable cost.
Bottom line: It’s important to clearly understand what you’re getting into before opting for a defined benefit pension plan.
How Much Can You Contribute to a Solo 401(k)?
When it comes to solo 401(k)s, elective deferral and employer contributions can really add up. To illustrate, suppose you’re 45 and operate a single-member limited liability company that’s treated as a sole proprietorship for tax purposes. In 2024, you have net self-employment (SE) income of $100,000 (after subtracting 50% of your SE tax bill).
In this case, the maximum deductible contribution to a solo 401(k) plan set up for your benefit would be $43,000. That amount is composed of 1) a $23,000 elective deferral contribution, and 2) a $20,000 employer contribution (20% of $100,000). This amount is significantly more than you could contribute to a Simplified Employee Pension (SEP). With a SEP, your maximum contribution would be $20,000 (20% of $100,000). The $23,000 difference is attributable to the solo 401(k)’s relatively generous elective deferral contribution.If, under the same business ownership scenario, you’re 50 or older, the maximum contribution to your solo 401(k) account would be $50,500. That amount is composed of 1) a $23,000 elective deferral contribution, including the $7,500 extra “catch-up” contribution, and 2) a $20,000 employer contribution (20% of $100,000).
What’s Best for You?
Solo 401(k)s and defined benefit pension plans are anything but simple. However, they can allow self-employed individuals to make substantial and deductible annual contributions to a retirement nest egg. Contact your tax and financial advisors before signing up for either option to determine what’s best for your situation.
New filing requirements issued by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) may impact your business. Corporations, limited liability companies (LLCs), limited partnerships, and other entities that file formation papers with any Secretary of State office (or similar government agency) must file a report with the U.S. Treasury Department’s FinCEN to provide specified information regarding the entity’s “beneficial owners.” Most entities in existence prior to January 1, 2024 must file this report by January 1, 2025.
Please note, our firm will not be preparing these reports on behalf of our clients as these are legal documents, not tax filings.
This new requirement is part of the federal government’s anti-money laundering and anti-tax evasion efforts and is an attempt to look beyond shell companies that are set up to hide money. Unfortunately, this will impose burdensome reporting requirements on most businesses, and the willful failure to report information and timely update any changed information can result in significant fines of up to $500 per day until the violation is remedied, or if criminal charges are brought, fines of up to $10,000 and/or two years imprisonment. These penalties can be imposed against the beneficial owner, the entity, and/or the person completing the report.
Beneficial owners are broadly defined and involve owners who directly or indirectly own more than 25% of the entity’s ownership interests or exercise substantial control over the reporting company (even if they don’t actually have an ownership interest). While this may seem to only impact a few significant owners, it can encompass many senior officers of the business as well as those individuals who are involved in any significant business decisions (e.g., board members). Given the severity of the fines, it may be safer to err on the side of overinclusion rather than under inclusion.
For entities formed after December 31, 2023, information will also have to be provided about the company applicants (the person who actually files the formation/registration papers and the person primarily responsible for directing or controlling the filing of the documents). The types of information that must be provided (and kept current) for these beneficial owners include the owner’s legal name, residential address, date of birth, and unique identifier number from a nonexpired passport, driver’s license, or state identification card. The entity will also have to provide an image of any of these forms of documentation to FinCEN for all beneficial owners.
In summary, most entities must file these reports by January 1, 2025. However, entities formed in 2024 and later years must file the report within 90 days of the entity’s formation.
Should any of the reported information change or a beneficial ownership interest be sold or transferred, the entity must report this information within 30 days of the change or face the potential of having the penalties described above imposed. Changes include reporting a beneficial owner’s change of address or name, a new passport number when a passport is replaced or renewed, or providing a copy of a renewed driver’s license.
As noted above, our firm is not preparing these reports. Regardless, we wanted to make sure you are aware of this new filing requirement and corresponding deadline.
The 2024 year-end is fast approaching! Given that this is an election year, and the presidential candidates are each promising big tax changes, it is important to start thinking about actions that may help lower your taxes for this year and the years to come.
We have compiled a list of potential actions based on current tax rules that may help you save tax dollars if you ACT BEFORE YEAR-END. Not all of them will apply to you, but you (or a family member) may benefit from many of them. Please review the following list. If you would like us to advise you on which tax-saving moves might be beneficial given your circumstances, please reach out to us at your earliest convenience so we can tailor a particular plan for you.
We have broken out the potential actions into the following sections:
Individuals
Stock Market Investor Strategies
Business
Individuals
For 2024, many taxpayers won’t need to itemize their deductions due to the high standard deduction ($29,200 for joint filers, $14,600 for singles and married filing separately, and $21,900 for heads of household) and the reduction or abolition of several itemized deductions.
Consider a bunching strategy to maximize deductions by concentrating medical expenses and charitable contributions into one calendar year.
Consider postponing income to 2025 (such as deferring a bonus) and accelerating deductions into 2024, especially for those anticipating a lower tax bracket in 2025. However, taxpayers expecting a more favorable filing status in 2024 or higher tax rates in 2025 may benefit more from accelerating income into 2024.
Consider donating appreciated publicly traded stock to get a two-fold benefit of the donation at fair market value without having to pick up the capital gains.
Consider using a credit card to pay deductible expenses before year-end.
Higher-income individuals should be cautious of the 3.8% surtax on certain unearned income. As year-end approaches, strategies to minimize or eliminate the surtax will vary based on estimated modified adjusted gross income and net investment income.
Higher-income earners may need to take year-end action regarding the 0.9% additional Medicare tax. This tax applies to individuals whose employment wages and self-employment income total more than an amount equal to the NIIT thresholds. Employers must withhold the additional Medicare tax from wages in excess of $200,000, regardless of filing status or other income. Self-employed persons must take this tax into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. This would be the case, for example, if an employee earns less than $200,000 from multiple employers but more than that amount in total. Such an employee would owe the additional Medicare tax, but nothing would have been withheld by any employer.
Consider converting your traditional IRA into a Roth IRA in 2024 if you believe a Roth IRA is better for you. A conversion is generally best during a year where you expect lower taxable income and/or when you have funds invested in underperforming stocks or mutual funds. Keep in mind that this conversion will increase your taxable income and could reduce tax breaks subject to phaseouts at higher AGI levels.
Required minimum distributions (RMDs) from a traditional IRA have not been waived for 2024. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts. Taxpayers may want to take RMDs by the end of 2024 to avoid having to double up on RMDs in 2025.
Consider making charitable donations via direct qualified charitable distributions from your traditional IRAs if you are age 70½ or over by the end of 2024, especially if you are unable to itemize your deductions. These distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on as an itemized deduction. However, you are still entitled to claim the entire standard deduction.
If facing a penalty for underpayment of estimated tax and increasing wage withholding will not sufficiently address the problem, consider taking an eligible rollover distribution from a qualified retirement plan before the end of 2024. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2024. You can then timely roll over the gross amount of the distribution (the net amount received plus the taxes withheld) to a traditional IRA. No part of the distribution will be includible in income for 2024, but the withheld tax will be applied pro rata over the full 2024 tax year to reduce previous underpayments of estimated tax.
If you become eligible in December of 2024 to make HSA contributions, you can make a full year’s worth of deductible HSA contributions for 2024.
Consider making gifts sheltered by the annual gift tax exclusion ($18,000) before the end of the year. The exclusion applies to gifts of up to $18,000 made in 2024 to each of an unlimited number of individuals. You cannot carry over unused exclusions to another year. These transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Consider utilizing energy-related credits and deductions under the Inflation Reduction Act of 2022.
If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster related losses, you may be able to claim losses on the tax return for the year the loss occurred.
Stock Market Investor Strategies
As year-end approaches, you should consider the following moves to make the best tax use of losses from your stock market investments:
Sell investments at a loss to offset earlier gains. A generally preferred tax strategy is to sell enough of the down-turn investments to generate losses to fully offset your earlier gains plus an additional $3,000 loss. The current tax legislation caps net capital losses at a maximum annual deduction of $3,000, which in turn can be used to offset ordinary income (as opposed to only capital gains).
Since individual taxpayers may carryover excess capital losses indefinitely, there is no reason to sell appreciated stocks simply to generate offsetting capital gains.
Keep in mind the wash sale rule which disallows taxpayers from deducting capital losses generated on securities that were sold at a loss and subsequently reacquired within 30 days.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer’s taxable income. If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains that can be sheltered by the 0% rate.
If selling an investment in a qualified small business stock (QSBS), consider the tax savings and rollover provisions.
Review your ISO, NQ, and RSU holdings to determine strategies to minimize tax.
Business
This year’s business planning is particularly challenging due to uncertainty over potential legislation that could raise corporate tax rates and increase taxes on business owners’ ordinary income and capital gains next year. While the standard year-end strategy of deferring income and accelerating deductions remains effective for most small businesses, proposed tax increases may lead high-income businesses to benefit from pulling income into 2024 to take advantage of currently lower rates and deferring deductible expenses to 2025. Implementing these strategies will require careful evaluation of all relevant factors.
Taxpayers (excluding C-corporations) may qualify for a deduction of up to 20% of their qualified business income, with limitations based on the type of business, the amount of W-2 wages paid, and the unadjusted basis of qualified property held by the business.
More small businesses now can use the cash method of accounting (as opposed to the accrual method), qualifying if their average annual gross receipts do not exceed $30 million over a three-year testing period for 2024. This method allows taxpayers to more easily shift income by delaying billings to the next year or accelerating expenses.
The generous Section 179 expense deduction limits allow many small and medium-sized businesses to deduct most or all their expenses for timely machinery and equipment purchases (up to $1,220,000 for 2024).
In 2024, the bonus depreciation deduction rate will drop to 60%, falling by 20% per year thereafter until it is completely phased out in 2027 (assuming Congress doesn’t take action to extend it).
Businesses may be able to take advantage of the de minimis safe harbor election to expense lower-cost assets and supplies, provided these costs don’t need to be capitalized under UNICAP rules.
Consider funding a qualified retirement plan and/or setting up a Simplified Employee Pension (SEP). As a reminder, if you have five or more employees, you must either set up a retirement plan with CalSavers or set up your own alternative plan.
Consider having your flow-through entity pay a portion of your state tax liability under the Pass-Through Entity (PTE) tax credit provisions.
In 2024, domestic Research and Experimentation costs (commonly called R&D) must be capitalized and amortized over five years (fifteen years if foreign sourced) instead of being expensed immediately.
A corporation (other than a large corporation) expecting a small net operating loss (NOL) for 2024 (and substantial taxable income in 2025) may benefit from accelerating just enough of its 2025 income or deferring 2024 deductions to create a small taxable income for 2024.
Year-end bonuses can be strategically timed for tax benefits by both cash and accrual basis employers.
To reduce 2024 taxable income, consider deferring a debt-cancellation event until 2025 or to accelerate, consider finalizing a debt-cancellation event.
Take steps to utilize prior year suspended basis, at-risk, or passive losses.
If your partnership, corporation or LLC hasn’t already filed the new Beneficial Owner Information (BOI) Report with the U.S. Treasury Department’s Financial Crimes Enforcement Network, make sure to do so by January 1, 2025. While this is a legal document and not a tax form, we want to make sure you don’t miss this important filing.
These are just some of the year-end steps that can be taken to save taxes. As you can tell from this letter, many provisions are quite complex and require some analysis based on individual facts. Even if you do not believe any of these provisions will apply to your 2024 tax situation, you should consider contacting us prior to year-end to run a tax projection and help you avoid unnecessary surprises come April 2025.
A California superior court has certified a class action suit that will stop the FTB from erroneously imposing the $800 annual/minimum tax on many out-of-state entities. The affected entities are LLCs, LP’s and corporations that were passive investors in LLCs doing business in California but were not actually doing business in California themselves.
Recently, various investing apps such as Robinhood, SoFi, and Webull have begun offering bonuses to individuals who transfer their individual retirement account (IRA) to them. The bonuses are generally based on a percentage of the amount transferred. The percentages tend to range between 1% and 3.5% which can mean quite a significant amount of “free money” to the transferor depending on the value of their account. However, it is very important that anyone considering such a transfer fully understands all of the details of the bonus including the tax consequences that may come into play.
There are some potential tax benefits of either taking the medical expense deduction or paying medical expenses through a Health Savings Account (HSA), Flexible Spending Account (FSA), Archer Medical Savings Account (MSA), or Health Reimbursement Account (HRA). These accounts will typically be available to you at work, so check with your employer’s human resources department. If you are self-employed, talk to me about your options for paying medical expenses.
Medical expenses can be claimed as a deduction only to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income (AGI). Medical expenses are deductible only if you itemize, which means that your itemized deductions must exceed your standard deduction. However, you can pay your medical expenses through one of the accounts in the previous paragraph regardless of income or whether you itemize.
Qualifying medical costs, which include many items other than hospital and doctor bills, often amount to a much larger figure than expected. Here are some items you should take into account in determining your medical costs:
Health insurance premiums. The cost of health insurance is a medical expense. This item, by itself, can total thousands of dollars a year. Even if your employer provides you with health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included in medical expenses, subject to specific dollar limits based on age.
Transportation. The cost of getting to and from medical treatment is a medical expense. This includes taxi fares, public transportation, or the cost of using your own car. Car costs can be calculated at 22¢ a mile for miles driven in 2023, plus tolls and parking. Alternatively, you can deduct your actual costs, such as for gas and oil, but not your general costs such as insurance, depreciation, or maintenance.
Therapists, nurses, etc. Services provided by individuals other than physicians can qualify as long as they relate to a medical condition and aren’t for general health. For example, costs of physical therapy after knee surgery would qualify, but not costs of a fitness counselor to tone you up. Amounts paid to a psychologist to treat a diagnosed medical illness are deductible medical expenses, but an amount paid for marital counseling is not. Amounts paid for certain long-term care services required by a chronically ill individual also qualify as deductible medical expenses.
Physical exams. The cost of a physical exam is a medical expense, because it provides a diagnosis of whether a disease or illness is present.
Eyeglasses, hearing aids, dental work. Deductible medical expenses include the cost of eye exams, glasses or contact lenses, hearing aids, dental exams and dental work (but not tooth whitening), and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify, but certain medically necessary cosmetic surgery is deductible.
Prescription and nonprescription drugs. Prescription drugs (including insulin) may be deducted or reimbursed under one of the health plans. Different rules apply to nonprescription drugs, such as aspirin. These don’t qualify for the deduction even if a physician recommends their use. However, both prescription and nonprescription drugs may be paid or reimbursed through an HSA, HRA, Archer MSA, or medical FSA.
Drug-abuse, alcoholism, and smoking-cessation programs. The costs of programs to treat alcoholism or drug addiction are deductible expenses because the programs treat a disease (substance abuse disorder). Amounts paid for participation in a smoking-cessation program and for prescribed drugs designed to alleviate nicotine withdrawal are deductible medical expenses. However, non-prescription nicotine gum and certain nicotine patches aren’t deductible.
Weight-loss and nutrition expenses. A weight-loss program is a deductible medical expense if undertaken as treatment for a disease diagnosed by a physician. The disease can be obesity itself or another disease, such as hypertension or heart disease, for which the doctor directs you to lose weight. It’s a good idea to get a written diagnosis before starting the program. Deductible expenses include fees paid to join the program and to attend periodic meetings.
Food or beverages purchased for weight loss or other health reasons are deductible only if all of the following are true: (1) the food or beverage does not satisfy normal nutritional needs, (2) the food or beverage alleviates or treats an illness, and (3) the need for the food or beverage is substantiated by a physician. The deductible (or reimbursable) medical expense is limited to the amount by which the cost of the food or beverage exceeds the cost of a product that satisfies normal nutritional needs. However, the cost of low-calorie food that you eat in place of your regular diet isn’t deductible.
The costs of nutritional supplements are a medical expense only if the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician. Otherwise, the cost of nutritional supplements is not a medical expense.
General health improvements/gym memberships. The costs of exercise for general health improvement are not health expenses, even if recommended by a doctor.
However, a gym membership may be a medical expense if the membership was purchased for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). Otherwise, the cost of a gym membership is for the general health of the individual and is not a medical expense.
Dependents and others. You can deduct the medical costs that you pay for your dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for an individual, such as an elderly parent or grandparent, who would qualify as your dependent except that he or she has too much gross income or files jointly. In most cases, the medical costs of a child of divorced parents can be claimed by the parent who pays them, regardless of who gets the dependency exemption.
Illegal expenses. Amounts paid for operations or treatments that are illegal under federal law (such as marijuana) are not medical expenses, even if permitted under state law.
Overall, medical costs are broadly defined for deduction and reimbursement purposes. If any of these examples apply to you, please contact us. We want you to get every deduction for which you are eligible.
Have you ever wondered how social security benefits fit into your taxes? How much they are taxed, or whether they are taxed at all, depends on your other income. In the worst-case scenario, 85% of your benefits would be taxed. (This doesn’t mean you pay 85% of your benefits back to the government in taxes—merely that you would include 85% of them in your income subject to your regular tax rates.)
To determine how much of your benefits are taxed, you must first determine your other income, including certain items otherwise excluded for tax purposes (for example, tax-exempt interest). Add to that the income of your spouse, if you file jointly. To this add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your total income plus half of your benefits. Now apply the following rules:
For married taxpayers, filing jointly:
1. If your income plus half your benefits is not above $32,000, none of your benefits are taxed.
2. If your income plus half your benefits exceeds $32,000 but is not more than $44,000, you will be taxed on (1) one half of the excess over $32,000, or (2) one half of the benefits, whichever is lower.
Example (1): S and D have $20,000 in taxable dividends, $2,400 of tax-exempt interest, and combined Social Security benefits of $21,000. So, their income plus half their benefits is $32,900 ($20,000 plus $2,400 plus 1/2 of $21,000). They must include $450 of the benefits in gross income (1/2 ($32,900 − $32,000)). (If their combined Social Security benefits were $5,000, and their income plus half their benefits were $40,000, they would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals $4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure is used.)
For single taxpayers:
1. If your income plus half your benefits is not above $25,000, none of your benefits are taxed.
2. If your income plus half your benefits exceeds $25,000 but is not more than $34,000, you will be taxed on (1) one half of the excess over $25,000, or (2) one half of the benefits, whichever is lower.
Example (1A): S has $20,000 in taxable dividends, $2,400 of tax-exempt interest, and Social Security benefits of $9,000. So, S’s income plus half S’s benefits is $26,900 ($20,000 plus $2,400 plus 1/2 of $9,000). S must include $950 of the benefits in gross income (1/2 ($26,900 − $25,000)). (If S’s Social Security benefits were $3,000, and S’s income plus half S’s benefits were $30,000, S would include $1,500 of the benefits in income: 1/2 ($30,000 − $25,000) equals $2,500, but 1/2 the $3,000 of benefits ($1,500) is lower, and the lower figure is used.)]
For either married or single taxpayers:
In many cases, If your income, plus half your benefits exceeds the limits listed above ($44,000 for married, or $34,000 for single taxpayers], the computation grows far more complex. Generally, however, unless your income plus half your benefits is fairly close to $44,000 [$34,000 for single taxpayers], if you fall into this category, 85% of your Social Security benefits will be taxed.
Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the above floor, or are paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost. You’ll have to pay tax (of course) on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits (since the higher your income the more of your Social Security benefits that are taxed), and you may get pushed into a higher marginal tax bracket. This situation might arise, for example, when you receive a large distribution from a retirement plan (such as an IRA) during the year or have large capital gains. Careful planning might be able to avoid this stiff tax result. For example, it may be possible to spread the additional income over more than one year, or liquidate assets other than an IRA account, such as stock showing only a small gain or stock whose gain can be offset by a capital loss on other shares. If you expect a large increase in your income, or you should need a large amount of cash for a specific purpose, please contact us before liquidating any assets. We can determine just what your additional tax cost will be and potentially reduce this cost with some planning.
If you know your social security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments.
If you’d like us to run some specific numbers for you, or if you would like to discuss this matter further, please call.
Taxpayers can transfer substantial amounts free of gift taxes to their children or other donees each year through the proper use of this annual exclusion.
The statutory exclusion amount ($10,000) is adjusted for inflation annually, using 1997 as the base year. The amount of the exclusion for 2022 is $16,000, and for 2023 is $17,000.
The exclusion covers gifts an individual makes to each donee each year. Thus, in 2023, a taxpayer with three children can transfer a total of $51,000 to his or her children every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there is no need to file a federal gift tax return. If annual gifts exceed $17,000, the exclusion covers the first $17,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below). (Note, this discussion is not relevant to gifts made by a donor to his or her spouse because these gifts are gift tax-free under separate marital deduction rules.)
Gift-splitting by married taxpayers. If the donor of the gift is married, gifts to donees made during a year can be treated as split between the spouses, even if the cash or gift property is actually given to a donee by only one of them. By gift-splitting, therefore, up to $34,000 in 2023 can be transferred to each donee by a married couple because their two annual exclusions are available. Thus, for example, a married couple with three married children can transfer a total of $204,000 in 2023 to their children and the children’s spouses ($34,000 for each of six donees).
Where gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) the spouses file. IRS prefers that both spouses indicate their consent on each return filed. (Because more than $17,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $34,000 exclusion covers total gifts. Please contact me regarding the preparation of a gift tax return (or returns), if more than $17,000 is being given to a single donee in 2023.)
The “present interest” requirement. For a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the donee’s enjoyment of the gift can’t be postponed into the future. For example, if you put cash into a trust and provide that donee A is to receive the income from it while A is alive and donee B is to receive the principal at A’s death, B’s interest is a “future interest.” Special valuation tables are consulted to determine the value of the separate interests you set up for each donee. The gift of the income interest qualifies for the annual exclusion because enjoyment of it is not deferred, so the first $17,000 (in 2023) of its total value will not be taxed. However, the gift of the other interest (called a “remainder” interest) is a taxable gift in its entirety.
Exception to present interest rule. If the donee of a gift is a minor and the terms of the trust provide that the income and property may be spent by or for the minor before he or she reaches age 21, and that any amount left is to go to the minor at age 21, then the annual exclusion is available (that is, the present interest rule will not apply). These arrangements (called Code Sec. 2503(c) trusts because of the section in the Internal Revenue Code that permits them) allow parents to set assets aside for future distribution to their children while taking advantage of the annual exclusion in the year the trust is set up.
“Unified” credit for taxable gifts. Even gifts that are not covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is so because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $12,060,000 in 2022 and $12,920,000 in 2023. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death. Feel free to contact us if you wish to discuss this area further or have questions about related topics.
