2023 Year-End Tax Planning for Individuals

The past few years have seen major changes in the economy. Inflation has led to both higher prices and higher interest rates. The market has seen major fluctuations. Tax planning is an important task for individuals. It can help to manage cash flow and minimize people’s tax bills. For example, deferring or accelerating income or deductions can make a big difference in the bottom line.
The following article offers an overview of changes in federal tax laws and regulations in 2023 and 2024. State, local and foreign taxes may also be subject to change. To ensure compliance with all relevant tax laws, individuals should work with a financial professional who has experience in their area.

New 2024 Tax Rates

Every year, the IRS makes adjustments to the tax brackets for income and capital gains taxes. This allows it to account for inflation and other changes to the cost of living.

Income Tax

The brackets for federal income tax will increase in 2024. The tax rates for each bracket will not change. This means that people with income within certain ranges may see their tax rates go down from 2023 to 2024. The tax rates for the highest and lowest tax brackets can be found here.

Alternative Minimum Tax

The exemption amounts for the alternative minimum tax can be found here.

Foreign Earned Income Exclusion

The foreign-earned income exclusion will increase to $126,500 in 2024 from $120,000 in 2023.

Capital Gains Tax

The lowest and highest brackets for the tax on long-term capital gains and qualified dividends will also increase in 2024. The bracket can be found here.

Kiddie Tax

Children’s unearned income above a certain threshold is subject to the “kiddie tax.” The threshold for 2024 is $2,300, a $100 increase over 2023. The rate of the tax is the income tax rate for the child’s taxable income or the parents’ income, whichever is higher.

Certain types of passive income may be subject to the net investment income tax (NIIT), but only if the taxpayer’s income is above a certain threshold amount, which has not changed since 2023. The amount of the NIIT is 3.8% of the lesser of either a taxpayer’s net investment income or their modified adjusted gross income over the above amounts:

  • Married filing jointly, or qualifying surviving spouse: $250,000
  •  Married filing separately: $125,000
  • Single or head of household: $200,000
Who Can Benefit the Most from Cost Segregation?

Cost segregation provides additional tax deductions on a year-to-year basis. The more actively involved a real estate investor is in a project, the more benefits they are likely to see from cost segregation.

Shifting Income and Deductions to Maximize Tax Benefits

One way to reduce tax liabilities for tax year 2023 involves deferring income and accelerating expenses. The best-case scenario involves receiving income during a year with a lower tax rate and incurring expenses during a year with a higher rate. The rates are not going to change, but the tax brackets will shift at the beginning of 2024. Some taxpayers could see their marginal tax rates go down as a result.

For example, a single person will be in the highest tax bracket in 2023 if their income exceeds $578,125. That level to exceed will increase to $609,350 in 2024. If that taxpayer’s income increases in 2024 but stays below $609,350, their marginal tax rate will go down from 37% to 35%. Putting income off until 2024 or incurring expenses early in 2023 could help taxpayers reach a lower marginal rate.

Examples of ways to defer income or accelerate expenses may include:

  • Delaying sales of capital assets for a gain until 2024;
  • Deferring interest or dividend payments from closely held corporations;
  • Waiting until 2024 to close deals that will bring commission income;
  • Identifying non-business debts owed to the taxpayer that could be written off as bad debt in 2023; and
  • Making additional charitable contributions or other deductible expenses before the end of 2023.
  • The NIIT offers another potential reason to defer income. If it is possible to put off realizing gains on the types of investments that the NIIT affects, that could help a taxpayer avoid the extra 3.8% tax.
Estate and Gift Taxes

The estate and gift taxes are subject to various exclusions, meaning that anything below the exclusion amount is not subject to those taxes. The gift tax has a per-year exclusion and a lifetime exclusion, both of which operate on a per-recipient basis. The IRS adjusts these amounts to account for inflation. The adjustment bracket can be found here.

State and Local Taxes

State and local income taxes (SALT) are deductible on taxpayers’ federal returns, but only up to a maximum of $10,000, or $5,000 for married taxpayers filing separately. This SALT limitation originated with the Tax Cuts and Jobs Act of 2017. It applies to SALT paid during the tax years 2018 through 2025.

Charitable Contributions

The total amount of charitable contributions that a taxpayer may deduct on their return is limited to 60% of their adjusted gross income (AGI). A taxpayer with $80,000 in AGI, for example, would be able to deduct a maximum of $48,000 in charitable contributions made during that tax year. In some situations, the maximum charitable deduction could be 50%, 30% or 20%.

Other 2024 Tax Changes

Other new developments in federal tax law and IRS regulations that individual taxpayers should know about include the following:

Increased Threshold for FICA Tax Withholding

The Social Security and Medicare programs receive funding from payroll tax deductions. For Social Security, employers deduct 6.2% of an employee’s gross wages or salary. They match the same amount, making the total amount paid into the system 12.4% of employee pay.

A limited amount of an employee’s total annual gross pay is subject to withholding for Social Security. In 2023, the limit is $160,200. It will increase to $168,600 in 2024. This means that the maximum amount that any employee will pay into Social Security will increase from $9,932.40 in 2023 to $10,453.20 in 2024.

Changes to Retirement Plan Contribution and Withdrawal Limits

Retirement plans, including individual retirement accounts (IRAs), 401(k) plans and others, are subject to varying limits on how much taxpayers may contribute and withdraw. Some of these limits will change from 2023 to 2024. These and other changes include the following:

  • The maximum elective contribution to a 401(k) or 403(b) plan will increase from $22,500 in 2023 to $23,000 in 2024. If an employee is at least 50 years old, and their plan allows “catch up contributions,” the limits are $30,000 for 2023 and $30,500 for 2024.
  •  The age that a taxpayer must begin taking required minimum distributions (RMDs) from their IRAs has increased to 73 as of 2023.
  • Taxpayers with certain types of retirement plans, including traditional IRAs, may make a penalty-free withdrawal of up to
Limits on Net Operating Losses and Excess Business Losses

A net operating loss (NOL) occurs when a taxpayer’s business expenses exceed their taxable income within a taxable year. Taxpayers can use NOLs to offset their tax liabilities in future years. This is known as a NOL carryforward.

Currently, NOL carryforwards are limited to 80% of a taxpayer’s taxable income. If a taxpayer has NOL of $200,000 and taxable income of $100,000, the maximum NOL they can apply to the current tax year is $80,000. That leaves NOL of $120,000 to carry forward to future years. Excess business loss (EBL) is a related concept, but it has more complicated rules. EBLs are subject to annual limits, but the remainder can be carried forward to future years.

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