Dear Client and Friends:
As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.
The time-tested approach of deferring income and accelerating deductions to minimize taxes still benefits most taxpayers, along with the tactic of “bunching” expenses into this year or the next to get around deduction restrictions.
We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.
TAX PLANNING IN A LOW INCOME YEAR
As always, it is generally important that you fully utilize deductions and consider using the lower 10 and 12 percent tax brackets if you are to maximize your tax planning strategies. For 2023, these lower tax brackets apply to $89,450 of taxable income for a married couple filing jointly and $44,725 of taxable income for singles. If your income is below those amounts and anticipated to rise next year, it may be advantageous to accelerate income and defer deductions for 2023.
ESTATE PLANNING
For Oregon residents, if your estate (combined with your spouse, if applicable) will be worth more than $1 million (the State of Oregon limit) when you die (including any life insurance your estate may receive), then you probably need to consider advanced estate and gift tax planning. There are many ways to reduce estate taxes. For Federal purposes, each individual can currently transfer up to $12,920,000 in their lifetime without incurring estate or gift tax, in addition to the annual gift tax exclusion of up to $17,000 per person for 2023.
If your will has not been updated recently, a review may be worthwhile. Even with an estate valued at less than $1 million, there are many family circumstances or philanthropic wishes that make an update a good idea.
YEAR END TAX PLANNING TIPS
The following is designed to highlight some tips that might be implemented to minimize your tax burden, either this year or in total over the next few years.
INDIVIDUALS:
1) Where possible, manage the timing of your income and deductions to your advantage:
a. Prepay deductible expenses or delay income if you are in the higher tax brackets. In most cases, you can use credit cards or credit lines to prepay deductible expenses.
b. Accelerate income into 2023 or delay paying deductible expenses until 2024 if you have no or low income in 2023 and expect higher income next year.
2) Consider selling stocks or other investments with gains or losses to increase or decrease your income as appropriate. The long-term capital gain rate is 15% if your modified adjusted gross income is $553,850 or less for married couples filing jointly or $492,400 or less for a single individual. This also applies to qualified corporate dividends.
3) Analyze your passive losses (including prior year carry forwards) to see if they are being limited and what steps can be taken to increase their use.
4) Be aware of required minimum distributions (RMDs) from retirement plans. The SECURE Act passed in late 2019, and updated under SECURE 2.0, increased the starting age for RMDs from 70 ½ to 72, and is now 73 as of Jan. 1, 2023; up to age 75 by 2033.
5) If you are receiving Social Security payments, be sure your year-end planning takes into account how it affects the taxability or possible repayment of your Social Security benefits.
6) Maximize your retirement plan contributions:
a. If your employer offers a qualified plan (401(k), SIMPLE IRA, SEP, etc.) consider increasing your contributions in the 4th quarter to take advantage of as much of the deferral contribution limit as possible.
b. Make an IRA contribution (up to $6,500 in 2023; $7,500 if age 50 or older) particularly if it is deductible and lowers your taxes, or a Roth IRA contribution if you are in a low tax bracket. This can be done until April 15, 2024. Please contact our office for help in determining how much to contribute and which type of IRA benefits you most.
7) Consider converting your existing IRA to a Roth IRA, particularly if you have market depressed investments. There is not an income limitation on conversions; however, the conversion is no longer reversible.
8) If you are eligible to make a Health Savings Account (HSA) contribution, you have until April 15, 2024, to make a 2023 contribution. If you become eligible late this year, you can make a full year’s worth of contributions even if you were not eligible for the entire year. Contributions to an HSA are deductible (within IRS-prescribed limits), earnings on the account are tax-deferred, and distributions are tax-free if made for qualifying medical expenses. If you make mid-year changes to a qualifying plan due to enrolling in Medicare, coverage changes due to a new employer, or employer’s benefits renew mid-year, you may need to pro-rate your HSA contribution limit.
9) Determine if your medical expenses have exceeded 7.5% of your adjusted gross income. If they have, and it lowers your tax burden, pay all outstanding medical bills by the end of the year to maximize the deduction.
10) Charitable Contributions:
a. Acquire written receipts for ALL charitable contributions.
b. Keep detailed records of non-cash contributions. List the property, condition, and fair market (thrift shop) value. Attach a detailed list to the receipt you receive. Also, if the non-cash donation is valued over $5,000, you must have a qualified appraiser sign IRS Form 8283.
c. Contribute appreciated stock to your favorite charity or to a donor advised fund. You get a deduction for the fair market value of the stock, but pay no tax on the capital gain.
d. Taxpayers age 70 ½ or older can make a qualified charitable distribution up to $100,000 per year from their IRAs.
e. Before December 31, 2023, take advantage of the Oregon Cultural Tax Credit by contributing any amount to a qualifying Oregon nonprofit cultural organization AND contributing a similar amount to the Oregon Cultural Trust. Then take a 100% dollar –for-dollar tax credit against your Oregon tax liability equal to your Oregon Cultural Trust contribution (up to the maximum limits of $500 for individuals, $1,000 for couple filing jointly, or $2,500 for Oregon corporations). See their website www.culturaltrust.org or call us for more information.
11) Remember to complete this year’s annual gifts (up to $17,000 per person for 2023) free of taxes by December 31, 2023, if you need to reduce potential estate taxes.
12) Assess the adequacy of your 2023 income tax withholdings to determine if an increase is needed to avoid any underestimated tax penalties.
13) For Oregon residents saving for college, the rules have changed regarding the Oregon 529 plan. Oregon now offers a tax credit-$150 for single filers, $300 for joint filers. There are some carry over provisions for allowing deductions from prior year contributions. Please speak to your accountant regarding this.
14) For those that had an Oregon income tax liability (paid Oregon income taxes in 2022) there will be a 44.28% “kicker” refund (based on your 2022 tax liability) applied to your 2023 Oregon return. This means your 4th Quarter 2023 Oregon estimated tax payment can be reduced!
BUSINESS OWNERS:
1) Increase (or start) your retirement plan contributions. Remember certain qualified plans (e.g. single member, profit sharing, 401(k), etc.) if desired for 2023, must be set up by December 31, 2023. However, SIMPLE IRAs and 401(k)s with multiple participants need to be set up before September 30 in the initial year for deductible contributions. Contributions can be made as late as the extended due date of your tax return. SEP plans can be set up and funded as late as the extended due date of the tax return. For 2023, the maximum contribution rate is generally 25% of earned income (a contribution maximum of $66,000 or $73,500 if 50 years or older, for most defined contribution plans).
2) Consider paying your children wages if they are working in your business and are in lower tax brackets. This probably will not be as beneficial for a partnership or a corporation and also will not be as effective if your children are over age 18 since Social Security taxes would have to be withheld and matched. It may, however, provide early retirement savings opportunities for your child. Worker’s compensation coverage may be required if you employ your children.
3) Consider selling cryptocurrency investments with losses and repurchasing at the same lower price as the “Wash Sale” rules do not currently apply to cryptocurrency sales. Thus, any losses can be fully claimed even if the same asset is purchased within 30 days.
4) Purchase needed equipment and furniture (new or used) and place in service by December 31, 2023 in order to potentially qualify for up to $1,160,000 of IRC §179 depreciation expense, or the now 80% bonus depreciation (which is very similar to IRC §179 expensing). Remember that there are special rules that may limit depreciation on certain vehicles. Bonus depreciation is reduced from 80% to 60% starting in 2024.
5) Consider paying a bonus out of your corporation to address reasonable compensation issues and withholding needs.
6) Consider tax benefits of incorporating certain limited liability structures if you are a sole proprietor or partnership.
7) Consider increasing your basis in your partnership or S-corporation to make possible a 2023 loss deduction (if your losses are being limited by basis or the “at-risk” rules)
8) Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2023 deductions even if you don’t pay your credit card bill until after the end of the year.
OREGON – PTE-E:
In July 2021, Oregon established an elective Pass-Through Entity Tax (PTE-E), a business alternative income tax in response to the $10,000 cap on the federal State and Local Tax (SALT) deduction added in the 2017 Federal Tax Cuts and Jobs Act.
For tax years beginning on or after January 1, 2022, entities taxed as S corporations and partnerships may elect annually to be subject to the PTE-E tax at a rate of 9 percent tax on the first $250,000 of distributive proceeds and 9.9 percent tax on any amount exceeding $250,000. The law will expire if the federal SALT deduction limitation expires or is repealed.
NOTE: Current Oregon law states that the OR PTE-E is available for 2022 and 2023. We are uncertain if this program will continue past 2023.
Qualifying members of an electing PTE are eligible for a credit equal to 100 percent of the member’s distributive share of the PTE-E tax paid.
An entity must first register (https://revenueonline.dor.oregon.gov/tap/_/#1, then select “Register for Business Tax”) with the Oregon Department of Revenue to make payments for the PTE-E tax. Listing entities will want to also pay this tax prior to 12/31/2023 in order to get the tax deduction in 2023.
See the PTE-E registration training (https://www.oregon.gov/dor/programs/businesses/Documents/PTEE-Registration-Training-06.09.pdf) for further details and/or see our website (www.FHJACPAS.com).
OREGON CORPORATE ACTIVITY TAX
Signed by Oregon’s governor on May 16, 2019, H.B. 3427 imposes a corporate activity tax (CAT) applicable to tax years beginning on or after January 1, 2020. The CAT is imposed in addition to the state’s current corporation excise and income tax.
The tax applies to corporations, individuals, partnerships, limited liability companies, federally disregarded entities, and ‘any other entities.’ Unitary groups register, file, and pay the tax as a single taxpayer. You must register within 30 days of reaching $750,000 of Oregon sourced gross revenue. The CAT is equal to 0.57 percent of a taxpayer’s Oregon-sourced ‘taxable commercial activity’ in excess of $1 million for the calendar year, plus $250. Thus, it is essentially a gross receipts tax; however, a deduction of up to 35% for labor or cost of sales is allowable.
Reporting requirements-Due January 31, 2024:
Please keep in mind that we would be glad to prepare any or all of these forms and/or reports for you or help with the preparation.
a. Form 1099-NEC must be sent by January 31, 2024, to anyone (other than corporations) who provided personal services to you totaling $600 or more in 2023. This includes consultants, attorneys, accountants, painters, janitors, etc. Also, a Form 1099-MISC must be sent for all rents paid. Since there is up to a $280 penalty for each Form 1099 not sent, our philosophy is: if in doubt, send one. A Form 1099 must be sent to attorneys even if they are incorporated. Doctors who are incorporated and who you have paid over $600 also get Form 1099 if the money you paid them is a business deduction. The information must also be filed with Federal and Oregon agencies by January 31, 2024. Oregon now requires ALL 1099 forms to be electronically filed. As of 2023, Federal requires 1099 forms to be electronically filed, if there are ten or more.
b. Form 1099-INT needs to be sent to anyone (other than corporations) who was paid more than $10 of interest in 2023 if the interest is a business deduction. This includes interest paid to owners or other related non-corporate business entities.
c. Form 1099-DIV needs to be sent by C Corporations only that paid dividends to their shareholders in 2023.
d. Form W-2 must be given to employees by January 31, 2024. The info must also be submitted to the Social Security Administration AND to the State of Oregon by January 31, 2024, electronically.
e. Oregon Form WR needs to be filed by all businesses with an Oregon Business Identification Number (BIN) by January 31, 2024, electronically.
Remember that W-2 wages reported must be adjusted for:
• Health insurance paid for S corporation shareholders who own greater than 2% of company stock
• Life Insurance provided in excess of $50,000 in coverage
• Personal use of company vehicles
Be sure to contact your payroll provider to have these amounts added to your W-2. We recommend contacting them in November to ensure they are included on your 2023 W-2.
If you need assistance calculating the correct inclusion amounts for life insurance or personal use of company vehicles, please contact us. We have attached a form for you to provide information regarding vehicle usage.
The Social Security tax limit for 2023 is $160,200. The 6.2% rate for both employees and employers is unchanged. The Medicare tax is unchanged at 1.45% for employees and employers with no income limitation. Self-employed persons pay a total of 15.3% up to the Social Security limit and 2.9% above that limit. The additional .9% Medicare withholding tax has not changed and is required when an employee’s compensation exceeds $200,000. Keep in mind income subject to Social Security tax impacts retirement plan contribution limits.
OUR RECORDS RETENTION POLICY
Based on the standards of our profession, our firm’s policy is to retain copies of tax returns and related work papers for six years after the date of filing. We suggest taxpayers keep all of their original receipts and records for seven years. Any documentation relating to “basis” (e.g. the closing statement for a property purchase) should be kept until seven years after receipt of the final payment from the property sale is reported. We also suggest that taxpayers retain copies of their individual and business tax returns indefinitely.
Please remember that developing tax strategies prior to December 31, 2023, could affect the size of your refund come next spring or reduce your overall tax burden. We strongly encourage you to contact us at your earliest convenience to set up a time to go over your individual tax situation if that is necessary this year. We also encourage you to visit our website at www.fhjacpas.com for recent tax law changes as well
as other helpful information for you and/or your business. In addition, your tax organizer will be sent to you by the first part of January. In order to timely file your personal tax return (without an extension), we kindly request that ALL of your tax information be received by us no later than Friday, March 22, 2024. If you have any questions, please let us know.
Disclaimer: The preceding information is intended as a general discussion and is not intended as a formal tax opinion. The recipient should not rely on any information contained herein without performing his or her own research. The conclusions reached should not be relied upon without an independent, professional analysis of the facts and laws applicable to the situation.
Very truly yours,
Fischer, Hayes, Joye & Allen, LLC
Personal Use of Company Auto
Fischer, Hayes, Joye & Allen, LLC – Information Sheet for Tax Year 2022
Please be advised, if you use a company owned or leased vehicle, the IRS requires that written records be maintained to document the business use of vehicles. Any unsubstantiated use of a company vehicle is considered personal use, and as such, is a taxable fringe benefit. The fair market value of this personal use is includable in your gross income and is subject to federal and state withholding as well as Social Security, Medicare and employment taxes.
It is not necessary to substantiate business use of company owned vehicles if either of the following conditions exists:
1. You have a written policy in place that prohibits all personal use of company vehicles.
2. The vehicle is considered a qualified non-personal use vehicle. Such a vehicle is one that, because of its design, would not likely be used for personal use. (i.e. tow truck, school bus, police car)
Please complete the information below for each company owned vehicle used this year and we will calculate the taxable fringe benefit to be included in each W-2, if any.
• Business Name: __________________________________________________________
• Employee Name: _________________________________________________________
• Description of Vehicle: ____________________________________________________
• Date of purchase/lease: ____________________________________________________
• Purchase price/fair market value at time of lease: _______________________________
• Dates used, if less than the full year: __________________________________________
• Odometer reading: Beginning _______________ Ending _________________
• Was the vehicle leased? YES / NO
• Was the vehicle available for personal use during off-duty hours? YES / NO
• Did you have another vehicle available for your personal use? YES / NO
• Did the company pay the cost of fuel consumed by this vehicle? YES / NO
• Please provide the number of miles in each of the following categories:
o Total commuting miles ______________
o Total other personal (non-commuting miles) ______________
o Total business miles ______________
3295 Triangle Drive S.E., Suite 200 • Salem, Oregon 97302
Voice 503-378-0220 • Fax 503-364-1259
www.fhjacpas.com