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Alerts and Updates

2023 Year-End Tax Planning Guide

December 20, 2023

2023 Year-End Tax Planning Guide

December 20, 2023

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Though the end of the year is quickly approaching, there is still time to take advantage of some of the opportunities afforded under the current tax law to reduce your 2023 tax liability.

135 Planning Tips and Tax Strategies to Consider for 2023 and 2024

2023 has quietly been a banner year for the economy. Inflation has cooled from its 2022 highs, the economy has added 2.6 million jobs through November 2023, and stocks are near all-time highs. However, many prognosticators feel that this unabated growth will inevitably slow in 2024, with a recession (or a “soft landing”) possibly looming on the horizon. As we enter this holiday season, we hope that you, your family and your loved ones are safe and healthy and find some light in this time of celebration.

Though the end of the year is quickly approaching, there is still time to take advantage of some of the opportunities afforded under the current tax law to reduce your 2023 tax liability. Our 2023 Year-End Tax Planning Guide highlights select and noteworthy tax provisions and potential planning opportunities to consider for this year and, in many cases, 2024.

Nearly a year ago, on December 29, 2022, the SECURE 2.0 Act (which we previously wrote about) became law, representing the only significant tax legislation of the past year. SECURE 2.0 contained a number of retirement plan provisions, including raising the age for required minimum distributions from 72 to 73 in 2023 (and 75 in 2033), requiring automatic enrollment in employer plans and allowing for a rollover of 529 plans to Roth IRAs.

With the swearing in of the 118th Congress on January 3, 2023, a bifurcated House and Senate limited the enactment of additional legislation in 2023, as expected. While no new tax legislation is expected in 2023 or early 2024, a few bipartisan provisions could always find their way into a must-pass spending bill before the January 19 and February 2 deadlines.

Some of the bipartisan items of legislation that may be considered in the next year include:

  • Elimination/reduction of the $10,000 cap on state and local tax deduction;
  • Enhanced child tax credit;
  • Refundable and/or increased dependent care credit;
  • Charitable contribution deduction for nonitemizers;
  • Reintroducing 100 percent bonus depreciation for assets placed in service before January 1, 2026, and;
  • Enhancements to the business interest expense deduction.

Please check in with us and keep a watchful eye on our Alerts published throughout the year, which contain information on tax developments and are designed to keep you informed while offering tax-saving opportunities.

In this 2023 Year-End Tax Planning Guide prepared by the CPAs, attorneys and IRS enrolled agents of the Tax Accounting Group of Duane Morris LLP, along with contributions from the trust and estate attorneys of our firm’s Private Client Services Practice Group, we walk you through the steps needed to assess your personal and business tax situation in light of both existing law and potential law changes, and identify actions needed before year-end and beyond to reduce your 2023 and future tax liabilities.

We hope you find this complimentary guide valuable and invite you to consult with us regarding any of the topics covered or your own unique situation. For additional information, please contact me, Michael A. Gillen, at 215.979.1635 or, John I. Frederick, Steven M. Packer or the practitioner with whom you are regularly in contact.

We wish you a joyous holiday season and a healthy, peaceful and successful new year.


Michael A. Gillen
Tax Accounting Group

About Duane Morris LLP

Duane Morris LLP, a law firm with more than 900 attorneys in offices across the United States and internationally, is asked by a broad array of clients to provide innovative solutions to today’s legal and business challenges. Evolving from a partnership of prominent lawyers in Philadelphia over a century ago, Duane Morris’ modern organization stretches from the U.S. to the U.K. and across Asia. Throughout this global expansion, Duane Morris has remained committed to preserving its collegial, collaborative culture that has attracted many talented attorneys. The firm’s leadership, and outside observers like the Harvard Business School, believe this culture is truly unique among large law firms and helps account for the firm continuing to prosper throughout changing economic and industry conditions. Most recently, Duane Morris has been recognized by BTI Consulting as both a client service leader and a highly recommended law firm. Additionally, multiple Duane Morris offices have received recognition as top workplaces for consecutive years.

At a Glance

  • Offices in 24 U.S. cities in 13 states and the District of Columbia
  • Offices in Asia and the United Kingdom, and liaisons in Latin America
  • More than 1,600 people
  • More than 900 lawyers
  • AM Law 100 since 2001

In addition to legal services, Duane Morris is a pioneer in establishing independent affiliates providing nonlegal services to complement and enhance the representation of our clients. The firm has independent affiliates employing more than 100 professionals engaged in other disciplines, such as the tax, accounting and litigation consulting services offered by the Tax Accounting Group.

About the Tax Accounting Group

Approaching our 45th anniversary, the Tax Accounting Group (TAG) was the first ancillary practice of Duane Morris LLP and is one of the largest tax, accounting and litigation consulting groups affiliated with any law firm in the United States. TAG has an active and diverse practice with over 60 service lines in more than 45 industries, serving as the entrusted adviser to clients in nearly every U.S. state and 25 countries through our regional access, national presence and global reach. In addition, TAG continues to enjoy impressive growth year over year, in large part because of our clients’ continued expression of confidence and referrals. To learn more about our service lines and industries served, please refer to our Quick Reference Service Guide.

TAG’s certified public accountants, certified fraud examiners, attorneys, financial consultants and advisers provide a broad range of cost-effective tax compliance, planning and consulting services as well as accounting, financial and management advisory services to individuals, businesses, estates, trusts and nonprofit organizations. TAG also provides an array of litigation consulting services to lawyers and law firms representing clients in regulatory and transactional matters and throughout various stages of litigation. Our one-of-a-kind CPA and lawyer platform allows us to efficiently deliver one-stop flexibility, customization and specialization to meet each of the traditional, advanced and unique needs of our clients, all with the convenience of a single-source provider.

We serve clients of all types and sizes, from high-net-worth individuals to young and emerging professionals, corporate executives to entrepreneurs, multigenerational families to single and multifamily offices, mature businesses to startups, global professional service firms to local companies, and foundations and nonprofits to governmental entities. We assist clients with a wide range of services, from traditional tax compliance to those with complex and unique needs, conventional tax planning to advanced strategies, domestic to international tax matters for clients working abroad as well as foreign businesses and individuals working in the United States, traditional civil tax representation to those criminally charged, those in need of customary accounting, financial and management advisory services, to those requiring innovative consulting solutions and those in need of sophisticated assistance in regulatory and transactional matters and throughout various stages of litigation.

With our service mission to enthusiastically provide effective solutions that exceed client expectations, and the passion, objectivity and deep experience of our talented professionals, including our dedicated senior staff with an average of over 25 years working together as a team at TAG (with a few having more than 30 years on our platform), TAG is truly distinctive. Being “truly distinctive and positively effective” is not just our TAGline, it is our way of life.

Whether you are a client new to TAG or are among the many who have been with us the entire 40-plus years, it is our honor and privilege to serve you.

From an economic and tax point of view, in many ways 2023 represented a return to normalcy. As we approach year-end, we are again fielding calls, outreaches and multiyear tax modeling requests from existing and new clients regarding year-end tax planning strategies available to individuals, businesses, estates, trusts and nonprofits. Without any major new tax legislation in 2023, we have gained quite a bit of certainty over future tax rates and provisions for the short term. With a divided Congress, not many tax provisions are currently in discussion, aside from several family-oriented provisions, a few business provisions such as the potential extension of 100 percent bonus depreciation and enhancements to the business interest expense deduction, and the possible elimination/reduction of the $10,000 cap on state and local tax deduction. While this clarity extends through 2024, with such an evenly split electorate, potential shifts in the White House and Congress in early 2025 loom.

In addition, and potentially even more important, we are just two short years away from the sunsetting of many provisions passed or modified under the Tax Cuts and Jobs Act of 2017 (TCJA). With the clock is ticking on provisions of the TCJA, the largest overhaul of the tax code in decades, many pieces of this legislation are scheduled to sunset in 2025.

These provisions include but are not limited to:

  • Lower marginal individual income tax rates;
  • Nearly doubled standard deductions;
  • Elimination of the personal exemption;
  • Child tax credit doubling to $2,000, with an increased income threshold;
  • State and local income tax deduction limitation of $10,000;
  • Reduction of mortgage interest deduction from $1 million of debt to $750,000;
  • Higher AMT exemptions and income thresholds, which dramatically decreased the impact of the individual AMT;
  • Qualified business income (QBI/199A) deduction of 20 percent;
  • Doubling of the estate and gift exclusion amount;
  • Deferring gains through qualified opportunity zones; and
  • Establishment of an employer credit for paid family and medical leave.

With so many tax provisions set to expire in such a short time, the next administration and Congress will have their hands full in negotiating the extension and modification of these and other provisions. At the moment, the most likely outcome seems that the TCJA could simply expire because our politicians fail to reach agreement on how to extend or modify it. As a result, it seems reasonable to at least plan for the possibility that taxes will be higher in the future (starting as early as 2026). It’s never too early to think about the future.

While you can depend on TAG for cost-effective tax compliance, planning and consulting services, as well as critical advocacy and prompt action in connection with your long-term personal and business objectives, we are also available for any immediate or last-minute needs you may have or those that Congress may legislate that impact your personal or business tax situation.

With only minor tax changes expected for 2024, the tried-and-true strategy of deferring income and accelerating deductions may be beneficial in reducing tax obligations for most taxpayers in 2023. With minor exceptions, this month is the last chance to develop and implement your tax plan for 2023, but it is certainly not the last opportunity.

For example, if you expect to be in the same tax bracket in 2024 as 2023, deferring taxable income and accelerating deductible expenses can possibly achieve overall tax savings for both 2023 and 2024. However, by reversing this technique and accelerating 2023 taxable income and/or deferring deductions to plan for a possible higher 2024 tax rate, your two-year tax savings may be higher. This may be an effective strategy for you if, for example, you have charitable contribution carryovers to absorb, your marital status will change next year or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation. Examine our “Words of Caution” section below for additional thoughts in this regard.

This guide provides tax planning strategies for corporate executives, businesses, individuals, including high-income and high-wealth families, nonprofit entities and trusts. We hope that this guide will help you leverage the tax benefits available to you presently, reinforce the tax savings strategies you may already have in place, or develop a tax-efficient plan for 2023 and 2024.

To help you prepare for an uncertain year-end, below is a quick reference guide of action steps, organized by several common individual scenarios, which can help you reach your tax-minimization goals as long as you act before the clock strikes midnight on New Year’s Eve. Not all of the action steps will apply in your particular situation, but you could likely benefit from many of them. Taxpayers may want to consult with us to develop and tailor a customized plan with defined multiyear tax modeling to focus on the specific actions that you are considering. We will be pleased to help you analyze the options and decide on the strategies that are most effective for you, your family and your business.

Whether you should accelerate taxable income or defer deductions between 2023 and 2024 largely depends on your projected highest (aka marginal) tax rate for each year. While the highest official marginal tax rate for 2023 is currently 37 percent, you might pay more tax than in 2022 even if you were in a higher tax bracket due to credit fluctuations, compositions of capital gains and dividends, and a myriad of other reasons.

The chart below summarizes the most common 2023 tax rates together with the corresponding taxable income levels presently in place. Effective management of your tax bracket can provide meaningful tax savings, as a change of just $1 in taxable income can shift you into the next higher or lower bracket. These differences can be further exacerbated by other income thresholds throughout the Internal Revenue Code, discussed later in this guide, such as those for determining eligibility for the child tax credit and qualified business income deductions, among others. Income deferral and acceleration, while being mindful of bracket thresholds, can be accomplished through numerous income strategies discussed in this guide, such as retirement distribution planning, bonus acceleration or deferral, and harvesting of capital gains and losses.

2023 Federal Income Tax Rate Schedule

Tax Rate


Head of Household

Married Couple


$0 - $11,000

$0 - $15,700

$0 - $22,000


$11,001 - $44,725

$15,701 - $59,850

$22,001 - $89,450


$44,726 - $95,375

$59,851 - $95,350

$89,451 - $190,750



$95,351 - $182,100

$190,751 - $364,200


$182.101 - $231,250

$182,101 - $231,250

$364,201 - $462,500


$231,251 - $578,125

$231,251 - $578,100

$462,501 - $693,750


Over $578,125

Over $578,100

Over $693,750


While reviewing this guide, please keep the following in mind:

  • Never let the tax tail wag the financial dog, as we often preach. Always assess economic viability. This guide is intended to help you achieve your personal and business financial objectives in a “tax efficient” manner. It is important to note that proposed transactions should make economic sense in addition to generating tax savings. Therefore, you should review your entire financial position prior to implementing changes. Various nontax factors can influence your year‑end planning, including a change in employment, your spouse reentering or exiting the work force, the adoption or birth of a child, a death in the family or a change in your marital status. It is best to look at your tax situation for at least two years at a time with the objective of reducing your tax liability for both years combined, not just for 2023. In particular, multiple years should be considered when implementing “bunching” or “timing” strategies, as discussed throughout this guide.
  • Be very cautious about accelerated timing causing you to lose too much value, including the time value of money. That is, any decision to save taxes by accelerating income must consider the possibility that this means paying taxes on the accelerated income earlier, which would require you to forego the use of money used to satisfy tax liabilities that could have been otherwise invested. Accordingly, the time value of money can make a bad decision worse or, hopefully, a good decision better―a delicate balance, indeed.
  • While the traditional strategies of deferring taxable income and accelerating deductible expenses will be beneficial for many taxpayers, with exceptions, you can often achieve overall tax efficiency by reversing this technique. For example, waiting to pay deductible expenses such as mortgage interest until 2024 would defer the tax deduction to 2024. Or, waiting to pay state and local taxes (SALT) until 2024 if you have already paid SALT of $10,000 in 2023 could also be worthwhile. You should consider deferring deductions and accelerating income if you expect to be in a higher tax bracket next year, you have charitable contribution carryovers to absorb, your marital status will change next year or your head of household or surviving spouse filing status ends this year. This analysis can be complex, and you should seek professional guidance before implementation.
  • Both individuals and businesses have many ways to “time” income and deductions, whether by acceleration or deferral. Businesses, for example, can make different types of elections that affect the timing of significant deductions. Faster or slower depreciation, including electing in or out of bonus depreciation, is one of the most significant. This type of strategy should be considered carefully as it will not simply defer a deduction into the following year but can push the deduction out much further or spread it over a number of years.

With these words of caution in mind, the following are observations and specific strategies that can be employed in the waning days of 2023 regarding income and deductions for the year, where the tried-and-true strategies of deferring taxable income and accelerating deductible expenses will result in maximum tax savings.

As we mentioned last year, with the passage of the Inflation Reduction Act in 2022, the IRS received a budget increase of approximately $80 billion over a 10-year period. This past year, the IRS has focused on catching up on processing of backlog returns, payments and letters due to lingering delays caused by the pandemic. As IRS operations shift focus from catch-up processing to enforcement efforts, new compliance efforts are being outlined by the IRS, targeting upper-income taxpayers. On September 8, 2023, the IRS announced plans to roll out new audit initiatives targeting America’s wealthiest taxpayers, including high-income and high-wealth individuals, partnerships and large corporations as well as abusive tax shelters pushed by promoters stretching the limits of legality.

This initiative was designed to increase scrutiny and ultimately increase attention and audit activity on these taxpayers who over the past decade saw sharp drops in audit rates (despite the modest reported increase between 2022 and 2021). The scrutiny will be driven with the aid of increased technology and the use of artificial intelligence to help IRS compliance teams to better detect those taxpayers to be audited.

The key focus of this effort will purportedly include:

  1. Taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. The IRS plans to have dozens of revenue officers focusing on the collection of these tax debts.
  2. The opening of 75 examinations of the largest partnerships in the U.S. that represent a cross section of industries that include hedge funds, real estate investment partnerships, publicly traded partnerships and law firms, including large partnership returns with ongoing discrepancies on balance sheets, which is an indicator of noncompliance.
  3. The launch of numerous compliance efforts focusing on abusive microcaptive insurance arrangements, syndicated conservation easement abuses as well as expanding efforts involving digital assets and Foreign Bank and Financial Accounts reporting violations.

Less than a week later, on September 14, 2023, the IRS halted processing of new employee retention credit claims amidst concerns over “questionable claims” and announced a process allowing business to withdraw these claims before they are processed. For more information, see our discussion later at item 12.

Finally, on September 20, 2023, the IRS announced plans to establish a new special enforcement team to focus on large or complex pass-through entities. The new unit will be a part of the IRS Large Business and International Division and staffed, in part, by new people joining the IRS under the new agency hiring initiative of more than 3,700 positions being added nationwide. Targeting high-income individuals remains a high priority for IRS, which we discuss in greater detail in our December 12, 2023, Alert.

For those high- and ultra-high-net-worth individuals, businesses and others (including those noted throughout this guide, such as cryptocurrency and digital asset owners) who are targeted groups in recent or new IRS compliance initiatives, the time to develop a plan and maintain documentation is now. In advance of any IRS examination, you may wish to work with experienced tax counsel to conduct a simulated audit to assess exposure and mitigate risk. We recommend that those taxpayers with exposure engage truly independent tax lawyers and CPAs who fall under attorney-client privilege to represent your interests, such as those in our National Tax Controversy Group. For more information on our National Tax Controversy Group and how to prepare yourself for an audit, see our prior Alert.

Below is a quick and easy reference guide of action steps that can help you reach your tax-minimization goals, as long as you act before year-end. In this guide, we have identified the best possible action items for you to consider, depending on how your income shapes up as the year draws to a close.

Not all of the action steps will apply in your particular situation, and some may be better for you than others. In addition, several steps can be taken before year-end that are not necessarily “quick and easy” but could yield even greater benefits. For example, perhaps this is the year that you finally set up your private foundation to achieve your charitable goals (see item 112) or maybe you decide it is time to review your estate plan in order to utilize the current unified credit (see items 115-130). Consultation to develop and tailor a customized plan focused on the specific actions that should be taken is paramount.

To help guide your thinking and planning in light of the multiple situations in which you may find yourself at year-end, we have compiled Quick-Strike Action Steps that follow different themes depending on several common situations. Due to the changing legislative environment, you may wish to consider several situations below and identify the most relevant and significant steps for your particular situation.

Quick-Strike Action Step Themes





You expect higher ordinary tax rates in 2024

Increased income

Getting married, subject to marriage penalty

Accelerate income into 2023

Defer deductions until 2024

Accelerate installment sale gain into 2023 (item 105)

Defer SALT payments to 2024 (item 20)

Bunch itemized deductions (item 22)

You expect lower ordinary tax rates in 2024


Income goes down


Accelerate deductions into 2023

Defer income until 2024

Defer income until 2024 (item 14)

Maximize medical deductions in 2023 (item 19)

Prepay January mortgage (item 21)

Consider deduction limits for charitable contributions (items 23 and 24)

Sell passive activities (item 40)

Increase basis in partnership and S corporation to maximize losses (item 41)

Maximize pre-tax retirement contributions (item 43)

Maximize contributions to FSAs and HSAs (items 55 and 56)

You have high capital gains in 2023

Business or property sold

An investment ends

Employee stock is sold

Reduce or defer gains

Invest in qualified opportunity zones (item 7)

Invest in 1202 small business stock (item 29)

Perform a like-kind exchange (item 37)

Harvest losses (item 28)

You have low capital gains in 2023

Carry forward losses

Increase capital gains

Maximize preferential gains rates (item 26)

1. Enjoy another year of reprieve from Form 1099-K reporting for users of Venmo, PayPal, CashApp, Uber, Doordash and Airbnb users. While Forms 1099-K were initially required to be issued for calendar year 2021 and after when gross payment card transactions for goods or services exceeded $600, the IRS has once again delayed implementation of this rule. For 2023, e-commerce companies will only be required to issue 1099-Ks based upon the old filing threshold of $20,000 in gross amounts and more than 200 transactions in a calendar year. For 2024, the IRS expects to lower the threshold to $5,000.

Observation—The $600 reporting threshold will still be in effect for those payees who do not provide their tax identification numbers and other information to the payor, as these payees will be subject to the backup withholding regime under IRC 3406(a).

Planning Tip—If you do receive a Form 1099-K for 2023, keep the form with your tax records and ensure you report the applicable income, while also documenting which payments are for personal reasons. Most settlement entities will not be aware whether a transaction is taxable or not, so it is the taxpayer’s responsibility to separate business from personal transactions with proper documentation.

2. Take advantage of a 529 to Roth rollover in 2024. Beginning in 2024, the SECURE ACT 2.0 permits beneficiaries of 529 college savings accounts to make up to $35,000 of direct trustee-to-trustee rollovers from a 529 account to their Roth IRA without tax or penalty. In order to qualify, two requirements must be met:

  1. The 529 account must have been open for more than 15 years; and
  2. The rollover must consist of amounts contributed to the 529 account more than five years prior to the conversion, plus earnings on those contributions.

Additionally, rollovers are subject to the Roth IRA annual contribution limits, but they are not limited based on the taxpayer's adjusted gross income (AGI). Therefore, if a married couple has earned income in 2024 of at least $6,500, they can begin transferring up to the annual contribution limit ($6,500) form the 529 plan account to a Roth IRA, assuming the other provisions are met above. They can make these rollover contributions each year until they max out at the lifetime cap of $35,000.

3. Familiarize yourself with the Inflation Reduction Act’s new energy tax credits. The Inflation Reduction Act of 2022, which became law in August 2022, changed our energy credit landscape for the next decade. Please see item 62 for a chart summarizing these credits. Some tax credits that may be of interest to individuals and small businesses include:

Energy Efficient Home Improvement Credit

Previously named the nonbusiness energy property credit, this credit has been extended through 2032. The credit is available to taxpayers who made qualifying, energy-efficient improvements to their homes. Beginning in 2023, the available credit is 30 percent of the costs of all eligible home improvements made during the year. The lifetime limit under the old law has been replaced with a $1,200 annual limit, which took effect January 1, 2023.

Residential Clean Energy Credit

Previously named the residential energy efficient property credit, this credit was scheduled to sunset at the end of 2023 but has now been extended through 2034. The credit is available for taxpayers who installed solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump and biomass fuel property in their homes. The Inflation Reduction Act increased the maximum percentage available for the credit to 30 percent for property placed in service after December 31, 2021, and before January 1, 2033, after which it will phase down to 26 percent for 2033 and 22 percent for 2034. While the credit is no longer be available for installations of biomass heaters and furnaces that were previously eligible, in 2023 the credit expanded to include battery storage technology that meets certain capacity requirements.

New Energy Efficient Home Credit

A credit designed for eligible contractors who build or substantially reconstruct qualified new energy-efficient homes has also been extended and enhanced under the Inflation Reduction Act. The available credit for homes acquired in 2023 through 2032 can range between $500 to $5,000 depending on the energy savings and efficient requirements being satisfied.

Planning Tip—For purposes of the energy efficient home improvement credit, the definition of “qualified energy property” was expanded in the Inflation Reduction Act to include the following:
  1. Electric or natural gas heat pump water heaters;
  2. Electric or natural gas heat pumps;
  3. Central air conditioners;
  4. Natural gas, propane or oil water heaters;
  5. Certain natural gas, propane or oil furnace or hot water boilers;
  6. Certain biomass stoves or boilers; and,
  7. Electrical panel upgrades necessary for other efficiency improvements.

Additionally, because of the expanded qualifying property, Congress deemed that more record retention and identification is required. Starting in 2025, manufacturers and taxpayers must comply with reporting the identification number of certain credit property. We suggest retaining all documents, starting now, related to your installation from both the manufacturer of the property and the installer.

4. Plan for the new and expanded electric vehicle tax credits. In addition to the home-related energy credits detailed in the previous section, the Inflation Reduction Act also introduced or extended several numerous credits related to vehicles for 2023:

New Clean Vehicle Credit

Previously named the qualified plug-in electric drive motor vehicle credit, this credit was available for each new plug-in electric drive motor vehicle placed in service. In addition to extending the credit through 2032, the act eliminates phaseout rules determined by the manufacture’s sales and stipulates that the final assembly of the vehicle must take place in North America.

Credit for Previously Owned Clean Vehicles

This credit is allowed for any previously owned clean vehicle purchased and placed into service in 2023 until 2032 and is limited to the lesser of $4,000 or 30 percent of the vehicle’s sale price. The credit is disallowed if the buyer meets certain income thresholds, as well as a $25,000 maximum price paid for the vehicle.

New Credit for Qualified Commercial Clean Vehicles

This credit is new and available for any qualifying vehicles acquired and placed in service before December 31, 2032. The maximum credit is impacted by the vehicle’s weight, as vehicles in excess of 14,000 pounds can receive a maximum credit of $40,000, while lighter vehicles are limited to $7,500. The credit for each vehicle is the lesser of either: (1) 15 percent of the vehicle’s basis (30 percent for vehicles not powered by gas or diesel); or (2) the “incremental cost” of the vehicle above what the price for a comparable gas- or diesel-powered vehicle would be.

Planning Tip—Dealers and sellers of clean vehicles should register with the IRS’s new Energy Credits Online portal. Beginning on January 1, 2024, buyers of qualifying new and previously owned clean vehicles can transfer their expected tax credit to a dealer who has registered with the IRS. The dealer can then provide the full amount of the expected credit to the buyer in the form of a down payment for the vehicle purchase or cash, allowing the buyer to receive their full credit at the time of the sale.

If you are in the market for an electric vehicle, it will be important to have these discussions with your dealer to confirm your dealer is following all rules regarding the new clean vehicle credits.

5. Claim a deduction for casualty and disaster losses. Notably in 2023, California suffered major damage from last winter's severe storms, flooding and mudslides that led to a federally declared emergency in the state. On October 16, 2023, the IRS announced further tax relief for California’s severe winter storm victims that reside or have a business in the majority of the state of California pushing their various tax deadlines to November 16, 2023.

Massachusetts and Maine also endured damage from Hurricane Lee that resulted in a federally declared emergency and resulted in their various tax deadlines moving to February 15, 2024. In addition, other states had federally declared disasters for damages caused by other storms, floods and wild fires. If you have any questions about whether an event qualifies, please do not hesitate to ask for clarification.

For tax purposes, any losses attributed to a federally declared emergency in 2023 can be pushed back into 2022, such as the closure of stores, losses on mark-to-market securities and permanent retirement of fixed assets. However, lost revenues and the decline in fair market value of property as a direct result of economic hardships would not constitute a loss under disaster rules.

For victims of these disasters that have not yet filed their 2022 tax returns, these losses can be included with their 2022 returns filed prior to the extended filing deadline. Currently, taxpayers choosing to claim their losses on their 2022 returns have until of October 15, 2024, to make this election. For those that have already filed 2022 returns, it is still possible to go back and amend 2022 filings, especially if 2022 profits could be offset with 2023 disaster losses. The subject of disaster losses remains a very complicated matter, and there are many rules and stipulations that would prevent taxpayers from taking advantage of the election. There are also certain reasons why taxpayers would not want to make the election and, for these reasons, we recommend consulting with us or your qualified tax professional before delving into the amendment process.

6. Shine some light on solar projects to capitalize on the expanded credit. For the past two years, we have seen much interest in the expanded solar credits from our clients. With the passage of the Inflation Reduction Act in 2022, the solar investment tax credit was increased to 30 percent of eligible expenses for projects installed between 2022 and 2032. After 2032, this credit will drop to 26 percent of eligible expenses in 2033 and 22 percent in 2034.

7. Invest in qualified opportunity zones to defer capital gains for three years. Gains can be deferred on the sale of appreciated stock that is reinvested within 180 days into a qualified opportunity fund (QOF). This gain is deferred until the investment is sold or December 31, 2026, whichever is earlier. An individual is able to defer a capital gain as long as the property was sold to an unrelated party. In addition to the deferral of gain, once the taxpayer has held the QOF investment for five years, they are able to increase their basis in the asset by 10 percent of the original gain. Due to this five-year holding period requirement, the QOF investment must have been acquired by December 31, 2021, in order to benefit from this basis step-up.

Although the contribution deadline for this basis increase has passed, a QOF still provides taxpayers the ability to defer capital gains until 2026 or the year in which the investment is sold, whichever is earlier. In addition, tax on the appreciation of the QOF may be avoided if the investment is held for over 10 years.

All states have communities that now qualify. Besides investing in a fund, one can also take advantage of this opportunity by establishing a business in the qualified opportunity zone or by investing in qualified opportunity zone property.

Potential Legislation Alert—In September 2023, bipartisan legislation was again introduced that would extend and enhance the opportunity zone program, currently set to expire at the end of 2026. The proposed bill follows a similar proposal first introduced in April 2022 and, if enacted, would extend the opportunity zone program to the end of 2028, providing taxpayers a longer deferral period and a longer period in which to invest in opportunity zones. By extending the deferral period to 2028, investments made by December 31, 2023, would also qualify for the 10 percent basis step-up. While the legislation is unlikely to pass by December 31, with the bipartisan support and sponsors it enjoys, it could sneak into budget legislation in its current or modified form.

8. Doing business in the United States? Prepare for beneficial ownership information reporting. The Corporate Transparency Act (CTA) of 2021 implemented uniform beneficial ownership information reporting requirements for corporations, limited liability companies and other business entities that were created in or are registered to do business in the United States, effective January 1, 2024. In a nutshell, the CTA will require owners of small companies to file a report with the Financial Crimes Enforcement Network (FinCEN) detailing basic information about the beneficial owners of the company, such as names, dates of birth, addresses and identifying numbers. Violations of the CTA and noncompliance with reporting requirements can have severe consequences (a $500-a-day penalty, up to $10,000, and up to two years’ imprisonment), so timely compliance is key.

So who is required to file a beneficial ownership information report, what information must be included and when does it need to be filed? The answer can be found in our June 13, 2023, Alert and December 7, 2023, Alert. Countless businesses are expected to be impacted, and if you assume you will not be affected, you may be risking severe penalties.

Observation—Many businesses value their privacy―from the large, family-run business to the tiny Etsy shop operating off a living room table. The CTA may challenge that desire for privacy, especially in states with lax information reporting requirements via their business registration process. As the information collected by Fin­CEN is expected to be shared with law enforcement, the IRS and other federal and state departments, this could represent a sea change in how laws are enforced at multiple levels of business. Therefore, careful attention should be given to business structuring, especially in closely held family businesses. Individual family members should consult with their trusted tax adviser and tax attorneys as may be required.

9. New corporate alternative minimum tax starting in 2023. To help pay for the many clean energy tax credits and incentives in the Inflation Reduction Act, a new corporate alternative minimum tax (AMT) was created, starting in 2023 with a 15 percent tax rate. Unlike the pre-2018 corporate alternative minimum tax, which was imposed on taxable income as adjusted, the new corporate alternative minimum tax is imposed on adjusted financial statement income.

Are You Subject to the New AMT?

The new AMT applies only to applicable corporations whose average annual adjusted financial statement income for the three-tax-year period ending with the current tax year exceeds $1 billion. However, special rules apply to members of a multinational group with a foreign parent, which cause the new AMT to apply if the average adjusted financial statement income for the corporation equals or exceeds $100 million. In addition, there are a number of aggregation rules, under which related businesses may be aggregated for purposes of the income test, including a rule that includes income of a partnership in which the corporation is a partner.

What Does Adjusted Financial Statement Income Include?

The new corporate AMT starts with the applicable financial statement, which is a certified statement prepared in accordance with general accepted accounting principles. Therefore, the start to the new corporate AMT will generally be Form 10-K filed with the SEC, or for nonregistrants, the latest annual audited financial statements. This financial statement income is then adjusted for the following items as detailed in the Inflation Reduction Act:

  • Statements covering different tax years;
  • Related entities―consolidated financial statements, consolidated returns and partnerships;
  • Certain items of foreign income;
  • Effectively connected income;
  • Certain taxes;
  • Disregarded entities;
  • Cooperatives;
  • Alaska native corporations;
  • Payment of certain tax credits;
  • Mortgage-servicing income;
  • Defined benefit plans;
  • Tax-exempt entities;
  • Depreciation;
  • Qualified wireless spectrum;
  • Financial statement net operating loss; and
  • Other items that the Treasury secretary may prescribe.
Planning Tip—Since the start of the new corporate AMT is the applicable financial statement, it is important to note that this statement will not contain any tax-favored exclusions including, deferrals of capital gains via an opportunity zone. As a result, businesses nearing or exceeding the thresholds above should exercise caution when considering an investment in an opportunity zone, as deferred gains relating to the opportunity zone may subject the business to additional AMT under the new regime.

10. Plan for the new 1 percent excise tax on stock repurchases. The Inflation Reduction Act added a 1 percent excise tax on the value of corporate stock buybacks of publicly traded companies, which applies to tax years beginning after December 31, 2022. Only repurchases that are treated as redemptions for tax purposes are subject to the tax, and a $1 million exemption is provided. The IRS and Treasury Department have currently only released interim guidance on the excise tax. Proposed regulations have not yet been issued. Until proposed regulations are issued, taxpayers are not required to report or pay the excise tax until the first quarter after the proposed regulations have been issued. Due to this unknown timing, please stay in close contact with your tax advisers so you can immediately begin the reporting processes under the proposed regulations to meet this small filing window.

11. Avoid scams and file a valid employee retention or other expanded credit. Due to a growing number of scams and fraudulent activity surrounding the employee retention credit (ERC), the IRS placed an immediate moratorium on the processing of new ERC claims on September 14, 2023, to last until at least December 31, 2023. For employers who missed out on filing a valid ERC claim, there is still time to file an amended employment tax return. Generally, there is a three-year statute of limitations to file an amended return that begins when the original employment tax return was filed. However, with respect to quarterly employment tax returns filed in the second and third quarters of 2021, the statute of limitations was extended to five years. While the ERC was designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits throughout the COVID-19 pandemic, as the economic recovery progressed, the credit was no longer serving its original purpose and expired on October 1, 2021. In order to qualify for the credit, the business must have paid wages while its operations were either completely or partially suspended by government order or during a quarter in which receipts were down 20 percent or more over the same quarter in 2019. A business may also qualify as a recovery startup business that began operations after February 15, 2020.

Another credit, the family and medical leave credit, has been extended through 2025. In order to qualify for this credit, employers’ written policies must provide at least two weeks of paid leave for eligible full-time employees and paid leave must be at least 50 percent of wages paid during a normal workweek. The credit ranges from 12.5 percent to 25 percent of wages paid to qualified employees who are out for a maximum of 12 weeks during the year.

Finally, the work opportunity tax credit is a nonrefundable credit for employers who employ certain individuals from targeted groups, such as veterans, low-income individuals and ex-felons. The size of the credit depends on the hired person’s target group, the number of individuals hired and the wages paid to each. This credit is also scheduled to expire at the end of 2025.

Observation—Many taxpayers are receiving third-party marketing materials claiming a high employee retention credit is available, and makes it seem as if the material is coming from the IRS. Taxpayers need to be wary of who is sending materials and should always contact their trusted tax adviser before moving forward. Additionally, to help combat the aggressive fraud involving the employee retention credit, the IRS has developed a new checklist regarding eligibility. Be prepared to answer more questions from your tax professional when applying for this credit.
Observation—Due to the number of scams and as part of a larger effort to protect small businesses and organizations, the IRS announced on October 19, 2023, a special withdrawal process to help those who filed an ERC claim and are now worried about its accuracy. If you find yourself with this concern, please contact your trusted tax adviser immediately.
Planning Tip—In advance of any IRS examination, you may wish to work with experienced tax counsel to conduct a simulated audit to assess exposure and mitigate risk. We recommend that those taxpayers with exposure or simply wishing to verify the accuracy of any claimed ERC to consider engaging truly independent tax lawyers and CPAs who fall under attorney-client privilege to represent your interests, such as those in our National Tax Controversy Group.

12. Consider withdrawing erroneous employee retention credit claims. Aggressive ERC solicitors have been pushing businesses to submit aggressive and ineligible ERC claims for the past three years. With the increased funding the IRS has received as a result of the inflation Reduction Act of 2022, the IRS has turned its attention to enforcement in this area, resulting in several lawsuits against these unscrupulous promotors, both by the IRS and their clients. As of September 2023, the IRS had over 600,000 ERC claims waiting to be processed. With such a large amount in processing, and in order to give these claims more careful scrutiny, the IRS announced that no new claims will be processed until 2024, while claims submitted before September 14, 2023, continue to be reviewed within 90 to 180 days of receipt, or longer if additional review or audit is needed. Additionally, the IRS has implemented the ERC claim withdrawal process for taxpayers who filed an ineligible claim. Steps to request an ERC claim withdrawal depend on whether a refund check has been received or cashed and if the IRS has started an audit of your claim. This withdrawal process is available only if all of the following apply:

  1. You filed an amended employment tax return to claim the ERC (Forms 941-X, 943-X, 944-X, CT-1X).
  2. You made no other changes on your amended return besides claiming the ERC.
  3. You intend to withdraw the entire amount of your ERC claim for the quarter.
  4. You have yet to receive the refund checks for the claim, or you have not cashed or deposited the refund check if the IRS has already processed your returns and paid your claim.

You will receive a letter from the IRS stating whether the withdrawal request was accepted or rejected. Without the acceptance letter, the withdrawal request is not considered completed. If your withdrawal is accepted, an amended income tax return may need to be prepared.

Planning Tip—When a taxpayer successfully withdraws an ERC claim, it will be treated as never filed. Thus, no interest or penalties will be imposed. However, withdrawing a fraudulent claim will not exempt you from potential criminal investigation and prosecution if the IRS determines that you willfully filed a fraudulent ERC claim or if you assisted or conspired in such conduct. This withdrawal process will last at least through the end of 2023. We encourage businesses to consult with a trusted tax professional who has an actual legal or tax background and understands the complexity of the ERC rules.

13. Return to normal for charitable contribution limits for C corporations. Corporations are limited to charitable contributions of 10 percent of taxable income. COVID-19 legislation changed this rate to varying amounts for years 2020 to 2022, but those laws have expired and C corporation taxpayers now face the same historical 10 percent limitation for 2023 and forward.

Virtually any cash-basis taxpayer can benefit from strategies that accelerate deductions or defer income, since it is generally better to pay taxes later rather than sooner (especially when income tax rates are not scheduled to increase). For example, a check you send in 2023 generally qualifies as a payment in 2023, even if it is not cashed or charged against your account until 2024. Similarly, deductible expenses paid by credit card are not deductible when you pay the credit card bill (for instance, in 2024), but when the charge is made (for instance, in 2023).

With respect to income deferral, cash-basis businesses, for example, can delay year-end billings so that they fall in the following year or accelerate business expenditures into the current year. On the investment side, income from short-term (i.e., maturity of one year or less) obligations like Treasury bills and short-term certificates of deposit is not recognized until maturity, so purchases of such investments in 2023 will push taxability of such income into 2024. For a wage earner (excluding an employee-shareholder of an S corporation with a 50 percent or greater ownership interest) who is fortunate enough to be expecting a bonus, he or she may be able to arrange with their employer to defer the bonus (and tax liability for it) until 2024. However, if any of this income becomes available to the wage earner, whether or not cash is actually received, the bonus will be taxable in 2023. This is known as the constructive receipt doctrine.

14. Defer income until 2024 to take advantage of inflation adjustments to tax brackets. For 2023, the top individual tax rate remains 37 percent and is applied to joint filers with taxable income greater than $693,750 and single filers with taxable income greater than $578,125. These thresholds will rise in 2024 to $731,200 for joint filers and $609,350 for single filers. It might be advantageous for many taxpayers to accelerate their deductions into 2023, reducing their potential tax liability this year. Additionally, for those who are able, taxpayers should plan to defer income into 2024 to take full advantage of the threshold increases to the tax brackets. While there are many ways to defer your income, waiting to recognize capital gains or exercise stock options are popular options that would not only lower your investment income, but your taxable income as well. Depending on your situation, these strategies could reduce tax due for 2023 and potentially 2024 as well.

15. Be aware of the largest increase to the standard deduction since the Tax Cuts and Jobs Act. Thanks to high inflation adjustments for 2023, the standard deduction has increased meaningfully to $27,700 for a joint return (an increase of $1,800) and $13,850 for a single return (an increase of $900) for those who do not itemize deductions. Taxpayers age 65 or older and those with certain disabilities may claim additional standard deductions.

Standard deduction (based on filing status)



Married filing jointly



Head of household



Single (including married filing separately)




Planning Tip—With the standard deduction continuing to increase, many taxpayers who previously itemized may find their total itemized deductions close to or below the standard deduction amount. In such cases, taxpayers should consider employing a “bunching” strategy to postpone or accelerate payments, which would increase itemized deductions. This bunching technique may allow taxpayers to claim the itemized deduction in alternating years, thus maximizing deductions and minimizing taxes over a two-year period. For a more in-depth discussion of bunching, see item 22.
Planning Tip—When the tax provisions of the TCJA sunset at the end of 2025, the current standard deduction is expected to be cut roughly in half. Before implementing any strategies related to postponing or accelerating itemized deductions, please consult with a qualified tax professional.

16. Carefully consider obtaining an IP PIN. The Identity Protection (IP) PIN is a six-digit number assigned by the IRS (and known only by the IRS and the taxpayer) that adds an additional layer of protection to the taxpayer’s sensitive tax information. Using an IP PIN prevents someone else from filing a return just by using your Social Security number or Individual Taxpayer Identification Number. Rather, the return must also include your unique IP PIN. Therefore, receiving and using an IP PIN will further protect your tax information whether you have previously been a victim of identity theft or just want to take precautions to plan ahead and avoid potential identity theft in the future. After you receive your IP PIN from the IRS, it is valid for one calendar year and must be renewed every year after. For greater detail, we previously wrote on this topic in an Alert. Additionally, the IRS has an FAQ about the IP PIN.

Observation—If your Social Security number has been exposed or compromised, we strongly advise obtaining an IP PIN. While this further layer of protection may seem appealing to those who wish to voluntarily opt in to the IP PIN program, some pros and cons first need to be considered. Having an IP PIN adds an extra task to worry about during tax season: remembering to apply for a new one every year. Additionally, the security of the IP PIN could extend the time it takes for your return to be processed. Filing with the incorrect IP PIN or forgetting yours could also add extra time to the processing of your tax return. Despite having to apply for a new IP PIN each year and deal with the potential delays that come along with the program, the benefits of having the increased security of your taxpayer information will be the deciding factor for many. Some will decide the increased security is worth it, while others may steer away from applying for an IP PIN to avoid the extra hassle of maintaining the protected status.
Planning Tip—The “Get an IP PIN tool is generally available from mid-January until mid-November each year. While this tool is very effective at safeguarding your tax information, it will require an extensive identity verification process. Additionally, spouses and dependents are eligible for an IP PIN if they can pass the verification process. Once you complete the verification, the IRS should provide your IP PIN to you immediately. Alternatives to the online tool are available, including filing an application or requesting an in-person meeting. However, the “Get an IP PIN” tool is the fastest approach to getting an IP PIN assigned to you.

17. Maximize child and dependent care credits. For tax year 2023, you may be able to claim the nonrefundable child and dependent care credit if you pay qualified expenses when you (and your spouse if filing a joint return) work. This credit is generally not allowed for married filing separately taxpayers. Your dependent must be under age 13, or an individual who was physically or mentally incapable of self-care with certain conditions. The maximum qualifying expenses you may use to calculate the credit are $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. In 2023, there is no limit to a taxpayer’s AGI in qualifying for the credit; however, the percentage of expenses available for credit would be reduced to 20 percent for most middle-income taxpayers whose AGI exceeds $43,000.

Planning Tip—As services are provided throughout the year, ask your child care providers for their taxpayer identification numbers and keep track of payments made. Consider whether individuals paid should be classified as household employees for whom you are required to issue a W-2. (See item 59.)

Percentage of Expenses Available for Dependent Care Credit (Based on Income)



34% to 21%


Adjusted gross income

$0 to $15,000

$15,001 to $43,000

$43,001 and above

18. Claim the maximum child tax credit. For 2023, the maximum credit remains at $2,000 per dependent under the age of 17. The refundable portion of the credit can go up to $1,600 per qualifying child (up from $1,500 in 2022 to adjust for inflation), depending on your income, and you must have earned income of at least $2,500 to even be eligible for the refund. Similar to 2022, the credit begins to phase out at incomes above $400,000 for married filing jointly taxpayers and $200,000 for any other filing status.

Phaseout Range of Child Tax Credit by Modified Adjusted Gross Income

Single/Married Filing Separately

Head of Household

Married Filing Jointly

$200,000 - $240,000

$200,000 - $240,000

$400,000 - $440,000


Planning Tip—The child tax credit computation goes hand-in-hand with modified AGI depending on your level of income. Of course, many tax benefits phase out at specified AGI thresholds. Decreasing your AGI could go a long way in maximizing these benefits. For the child tax credit in particular, the credit phases out in $50 increments―meaning that, for some taxpayers, a $1 increase in AGI can trigger a $50 reduction in the credit. As year-end nears, taxpayers who otherwise qualify for a tax benefit should consider strategies to reduce AGI this year to keep their income level below the relevant phaseout threshold.
Planning Tip—To claim the child tax credit, a qualifying child must have a valid Social Security number and be a U.S. citizen, U.S. national or U.S. resident alien. A qualifying child with only an Individual Taxpayer Identification Number would not qualify for the child tax credit; however, the other dependent credit worth $500 may be allowed. Employees should pay attention when filing out the W-4, employee’s withholding certificate, to identify the eligibility of claiming dependent and other credits.

Itemized Deduction Planning

19. Pay any medical bills in 2023. The Consolidated Appropriations Act of 2021 permanently reduced the medical expense deduction floor to 7.5 percent of AGI. Additionally, the deduction is no longer an AMT preference item, meaning that even taxpayers who are subject to the AMT benefit from deductible medical expenses.

Planning Tip—Be sure to pay all medical costs for you, your spouse and any qualified dependents in 2023 if, with payment, your medical expenses are projected to exceed 7.5 percent of your 2023 AGI, as this will lower your tax liability for 2023. You also may wish to accelerate any qualified elective medical procedures into 2023 if appropriate and deductible.
Observation—Precise timing of year-end medical payments remitted by credit card or check can yield tax savings. All eligible medical expenses remitted by credit card before the end of the current year are deducible on this year’s return, even if you are not billed for the charge until January. If you pay by a check that is dated and postmarked by December 31, it will count as a payment incurred this year even if the payee does not deposit the check until the new year (assuming the check is honored when presented for payment).

20. Defer your state and local tax payments until 2024. The limitation of the state and local tax deduction was one of the most notable changes enacted by the TCJA in 2017. In 2023, the deduction limit for state and local income or sales and property taxes of $10,000 per return ($5,000 in the case of a married individual filing separately) remains unchanged, though each year more and more states introduce measures to try and circumvent this limitation, such as pass-through entity (PTE) tax arrangements that will enable a deduction at the individual level. See the next observation below.

Planning Tip—If you live in a state with either high income, sales or real estate taxes and you are not subject to AMT, this could significantly change your tax calculation. As the year draws to a close, if you have already exceeded the $10,000 in state and local tax payments deductible under current law, you may wish to consider postponing any additional payments into early 2024, where appropriate. For many taxpayers, prepaying state and local taxes will be of no benefit in 2023. Generally, we advise many taxpayers to accelerate deductions into the current year where possible. However, if an additional state or local tax payment has no federal tax benefit in 2023, capitalize on the time value of money and pay the tax in 2024 if you can do so without incurring penalty and interest.
Observation—IRS Notice 2020-75 outlined that “specified income tax payments” are deductible by partnerships and S corporations in computing income or loss and are not taken into account when applying the SALT limitation to a partner in a partnership or shareholder in an S corporation.

As a result, a newer type of PTE tax strategy has been enacted by many states since the SALT cap of $10,000 was established by TCJA. By imposing an income tax directly on the PTE on behalf of the respective owners, a state’s tax on PTE income now becomes a deduction for the PTE for federal income tax purposes. Generally, states with PTE elections fall within two categories: a deduction for previously taxed income (reducing state taxable income on the owner’s individual return), or a credit for the tax liability incurred by the PTE (reducing the state tax liability dollar-for-dollar on the owner’s individual return).

Currently, 36 states and one locality assess such a tax (up from 29 states and zero localities this time last year): Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Mississippi, Montana, Nebraska, New Jersey, New Mexico, New York, New York City, North Carolina, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia and Wisconsin. The legislatures of Maine, Pennsylvania and Vermont have proposed PTE tax bills that are still pending. See item 81 for more information. Please contact us or your qualified tax professional to crunch the numbers on this tax to evaluate the potential tax benefits of a workaround strategy.

21. Prepay your January mortgage payment if you will be under the mortgage interest limitation. For acquisition indebtedness incurred after December 15, 2017, the mortgage interest deduction is limited to interest incurred on up to $750,000 of debt ($375,000 in the case of a married individual filing a separate return). The mortgage interest from both a taxpayer’s primary and secondary residences remains deductible up to this balance limit on newer debt. For debt existing prior to December 15, 2017, the limit remains at the pre-TCJA amount of $1 million for original mortgage debt.

Regardless of the date incurred, home equity indebtedness not used to substantially improve a qualified home is no longer deductible. However, if a portion of the funds taken from home equity indebtedness are used to improve the property, an equal percentage of the interest paid on that debt can be deducted.

Planning Tip—It is important to consider how the proceeds of any home equity loans were used in determining whether or not the interest is deductible. While proceeds from home equity loans used to pay general household bills do not result in deductible interest, if you used the proceeds to improve your primary home, such home equity interest may be deductible. Thus, if you have a home equity loan that you originally used for other purposes and are considering paying cash for home renovations, you may wish to pay off the loan and use it for the new renovations to create deductible interest. In addition, if you are planning to refinance and your total mortgage balance will exceed $750,000, please contact us or your qualified tax professional to ensure you retain maximum deductibility and do not run afoul of certain rules related to refinancing mortgage indebtedness.

22. Consider paying state and local taxes, mortgage interest, medical expenses, charitable gifts, etc. (subject to limits noted within this guide) in the same year as opposed to spreading the payments over two years. By bunching deductions and deferring taxable income along with using AGI‑reducing techniques, you increase the value of all deductions and reduce your overall tax liability.

In considering the strategies noted below, however, keep in mind that if you pay a deductible expense in December 2023 instead of January 2024, you reduce your 2023 tax instead of your 2024 tax, but you also lose the use of your money for one month. Generally, this will be to your advantage from a tax perspective, unless in one month you can generate a better return on use of the funds than the tax savings. In other words, you must decide whether the cash used to pay the expense early should be for something more urgent or more valuable than the increased tax benefit.

Planning Tip—If you have already paid state and local taxes of $10,000 in 2023, waiting to pay state and local taxes until 2024 could be worthwhile―not only in the event tax rates increase in 2024, but also if the $10,000 SALT cap is ever modified or repealed, which, while it is being considered, remains an uncertain possibility.

Taxpayers with fluctuating income should try bunching their SALT payments, itemizing their deductions in one year and taking the standard deduction in the next. For this strategy to work, however, the tax must have been assessed before the payment is made (as determined by the state or local jurisdiction).

Taxpayers can also elect to deduct sales and use tax in lieu of income taxes. Accelerating the purchase of a big-ticket item into this year is a good way to achieve a higher itemized deduction for sales taxes.

Planning Tip—Though unlikely due to currently high mortgage rates, you may wish to consider refinancing your mortgage if you can secure a rate two or more points below your current rate. Any points you paid on a previous refinancing that have not been fully amortized would be deductible in full in 2023, as long as the previous mortgage is paid off by the end of the year. In addition, even though the interest paid on a lower-rate mortgage would be less and would result in a smaller tax deduction, it also would improve your monthly cash flow. As noted above, use sound economic planning in your decision-making process rather than viewing every transaction in terms of its tax effect. Contact us or your qualified tax professional for a comprehensive assessment if you are contemplating a refinance.

The following chart illustrates the tax treatment of selected types of interest.

Interest Expense Deduction Summary*

Type of debt

Not deductible

Itemized deduction

Business or above-the-line deduction

Consumer or personal



Taxable investment [1]



Qualified residence [2]



Tax-exempt investment



Trading and business activities



Passive activities [3]




* Deductibility may be subject to other rules and restrictions.

[1] Generally limited to net investment income.

[2] For 2023, including debt of up to $750,000 ($1 million for debt incurred prior to December 16, 2017) associated with primary and one secondary residence. Home equity loan interest deduction is suspended, unless the loan proceeds are used to buy, build or substantially improve the taxpayer’s home securing the loan.

[3] Subject to passive activity rules.

Charitable Contributions

You may wish to consider paying 2024 pledges in 2023 to maximize the “bunching” effect, perhaps through a donor-advised fund, which is a charitable giving vehicle that can assist with “bunching” of charitable contributions into a given year. This can be useful when you are able to make a donation but have yet to determine the timing of the distributions out of the donor-advised fund or which charities will receive the gift.

Planning Tip—Instead of making contributions in early 2024, you can make your 2024 contributions in December 2023. By making two years of charitable contributions in one year, you would increase the amount of itemized deductions that exceed the standard deduction amount, increasing their value. You could then take the standard deduction in 2024 and perhaps again in 2026, years in which you do not make any contributions (though the potential sunsetting of the TCJA, and the reversion back to the lower standard deduction amount must be considered). If you are looking to maximize your charitable contributions, TAG or your qualified tax adviser can assist with determining whether AGI limitations will apply and the timing of the gifts to fully utilize your deduction.

In addition to achieving a large charitable impact in 2023, this strategy could produce a larger two-year deduction than two separate years of itemized deductions, depending on income level, tax filing status and giving amounts each year.

Investment Interest

This is interest on loans used to purchase or carry property held for investment purposes (e.g., interest on margin accounts, interest on debt used to purchase taxable bonds, stock, etc.). Investment interest is fully deductible to the extent of net investment income, unless incurred to purchase securities that produce tax-exempt income. Net investment income is equal to investment income less deductible investment expenses. Sources of investment income include income from interest, nonqualified dividends, rents and royalties. Investment expenses include depreciation, depletion, attorney fees, accounting fees and management fees. If you bunch your investment expenses in one year so that little or no investment interest is deductible, the nondeductible investment interest can be carried forward to the following year.

By rearranging your borrowing, you may be able to convert nondeductible interest to deductible investment interest. In addition, you may be able to increase your otherwise nondeductible investment interest by disposing of property that will generate a short‑term capital gain. The extra investment interest deduction may even offset the entire tax on the gain. Disposing of property that will generate long‑term capital gain will not increase your investment income unless you elect to pay regular income tax rates on the gain. Accordingly, you should review your debt and investment positions before disposing of such property.

Planning Tip—An election can be made to treat qualified dividend income as nonqualified. This would increase the amount of net investment income, and consequently the amount of deductible investment interest. Although the election would result in qualified dividend income being taxed at the taxpayer’s top marginal income tax rate rather than, in general, at a 20 percent rate, tax savings could result. The only way to determine if this makes sense is to crunch the numbers and see if the overall tax liability decreases. Since investment interest is deductible for AMT purposes, making this election could reduce the AMT.

Medical and Dental Expenses

As discussed in item 19 above, a medical deduction is allowed only to the extent that your unreimbursed medical outlays exceed 7.5 percent of your AGI. To exceed this threshold, you may have to bunch expenses into a single year by accelerating or deferring payment as appropriate.

Planning Tip—Keep in mind that premiums paid on a qualified long-term care insurance policy are deductible as medical expenses. The maximum amount of the deduction is based on the taxpayer’s age. For example, the deduction for such premiums paid for an individual age 40 or younger is limited to $480, while the deduction for an individual age 71 or older is limited to $5,960. These limits have slightly increased from 2022. Also keep in mind that these limitations are per person, not per tax return―so a married couple where both husband and wife are 71 or older would be entitled to a maximum deduction of $11,920, subject to the 7.5 percent of AGI floor as noted above.
Planning Tip—In certain cases, you may be able to choose an upfront, lump-sum payment for medical services in lieu of a payment plan, such as for a child’s braces. By making a lump-sum payment, the entire cost is credited in the year paid, thereby dramatically increasing your medical expenses for that year. If you prefer to not pay the up-front payment with cash, then you can pay by credit card, which is treated as a lump-sum payment for tax purposes even if the credit card bill is not paid by the end of the tax year. However, if using a credit card, you must realize that the credit card interest is not deductible. This means you should determine if incurring the interest is worth the increased medical expenses to get you over the 7.5 percent threshold.
Observation—A divorced parent generally can deduct medical payments incurred for his or her child even though the other parent claims the dependency exemption. Also, an adult child may be entitled to a deduction for the medical expenses paid on behalf of a parent, even though the child cannot claim the parent as a dependent because the parent has gross income of at least $4,700 in 2023, generally exclusive of Social Security income.

Charitable Giving

23. Plan for deduction limits when donating noncash charitable contributions. Donating appreciated securities such as stocks, bonds and mutual funds directly to charity allows a taxpayer to avoid taxes on these capital gains, though the deduction for capital gain property is generally limited to 30 percent of AGI.

For personal property, the charitable deduction for airplanes, boats and vehicles may not exceed the gross proceeds from their resale. Form 1098-C must be attached to tax returns claiming these types of noncash charitable contribution. Furthermore, donations of used clothing and household items, including furniture, electronics, linens, appliances and similar items, must be in “good” or better condition to be deductible. You should maintain a list of such contributions together with photos to establish the item’s condition. To the extent they are not in “good condition,” you will need to secure a written appraisal to deduct individual items valued at more than $500.

Observation—Substantiation of charitable contributions has grown in importance in the eyes of the courts and the IRS. If you are thinking of making a large noncash charitable contribution that is not in the form of publicly traded stock, make sure you acquire and maintain the correct information and forms needed to substantiate your deduction. Charitable contributions in excess of $250 must have a written acknowledgment from the organization, while most contributions over $5,000 will require an appraisal. The chart below is a useful guide for determining what you need to have in order to deduct your noncash charitable contribution.

Noncash Contribution Substantiation Guide

Type of donation

Amount donated

Less than $250

$250 to $500

$501 to $5,000

Over $5,000

Publicly traded

• Receipt
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records

traded stock

• Receipt
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records
• Qualified appraisal
• Form 8283 Section B


• Receipt
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records
• Qualified appraisal
• Form 8283 Section B

Vehicles, boats
and airplanes

• Receipt
• Written records

• 1098-C or
• Acknowledgment

• 1098-C and
• Written records

• 1098-C
• Written records
• Qualified appraisal
• Form 8283 Section B

All other noncash

• Receipt
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records
• Qualified appraisal
• Form 8283 Section B

Volunteer out-of-pocket expenses

• Receipt
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records

• Acknowledgment
• Written records


Observation—Earlier this year, the IRS has issued a Chief Counsel Advice memorandum that indicates qualified appraisals are required for taxpayers who wish to claim a deduction for donating cryptocurrency in excess of $5,000 in a taxable year. The memorandum also advises that cryptocurrency does not meet the qualifications to be exempt from the appraisal requirement that is provided for donations of certain readily valued property―the exception that allows deductions for donations of publicly traded securities without an appraisal. Therefore, it is best practice for taxpayers to have a qualified appraisal of donated cryptocurrency. Without an appraisal, the deduction may be denied.
Planning Tip—Another noncash contribution you may consider is a conservation easement. A conservation easement allows for the permanent use of real property by a government or charity—such as preservation of open space, wildlife habitats or for outdoor recreation. The easements afford the donor a charitable contribution for the difference in the fair market value of the property prior to the grant of the easement less the value of the property after the easement. The deduction is taken in the year of the transfer even though the charity does not receive the property until a later time, if ever.

Conservation easements can have additional benefits that extend beyond federal charitable deductions. At least 16 states have programs that will provide a state tax credit. These programs can be quite involved, and proper procedures with the state must be implemented correctly and timely. However, with the passage of the TCJA and the corresponding SALT limit of $10,000, the IRS has determined that these state credits create an “expectation of a return benefit [that] negates the requisite charitable intent.” Therefore, consultation with a qualified tax professional must be conducted to arrive at the correct charitable conservation easement deduction when a state tax credit is or can be received.

24. Make intelligent gifts to charities. With many stocks gaining ground in 2023, gifts of appreciated stock remain a great way to maximize charitable gifting while also avoiding capital gains taxes. Do not give away loser stocks (those that are worth less today than what you paid for them). Instead, sell the shares and take advantage of the resulting capital loss to shelter your capital gains or income from other sources, as explained above. Then give cash to the charity since you just sold the stock and will have the cash on hand. As for winner stocks, give them away to charity instead of donating cash. Under either situation, you recognize multiple tax benefits. When gifting appreciated stock to charity, you not only avoid paying taxes on capital gains, gifts and estates, but you may be able to deduct the value of the stock for income tax and AMT purposes as well. As always, be aware that gifts to political campaigns or organizations are not deductible.

Charitable donations are subject to the same AGI limitations in 2023 as for 2022. Keep in mind the 100 percent of AGI level for cash donations to a public charity only applied to tax years 2020 and 2021. It was not extended and reverted to 60 percent back in 2022.

Deductions Allowable for Contributions of Various Property



Tangible personal property

Appreciated property

Public charity

60% of AGI

50% of AGI

30% of AGI

Private operating foundation

60% of AGI

30% of AGI

30% of AGI

Private nonoperating foundation

30% of AGI

30% of AGI

20% of AGI

Donor-advised fund

60% of AGI

30% of AGI

30% of AGI


Planning Tip—Another strategy to consider is a charitable remainder trust, where income-producing assets are transferred to an irrevocable trust. The donor or other noncharitable beneficiaries receive trust income for life or for a period of years. The donor receives an upfront charitable contribution equal to the present value of the remainder interest. The charity receives the remaining trust assets when the income interests end. For the estate tax implications of a charitable remainder trust, see item 123. Also, consider the use of donor-advised funds, where you can contribute cash, securities or other assets. Other assets may include valuable antiques, stamp and coin collections, art, cars and boats. You can take a deduction and invest the funds for tax-free growth while recommending grants to any qualified public charity.
Observation—It is important to confirm that the donation you are considering is contributed to an organization that is eligible to receive tax-deductible donations (known as a “qualified charity”). The IRS website has a qualified charity search tool to help you determine eligibility.

25. Consider an investment in a special-purpose entity. As an additional workaround to the SALT limitations mentioned previously in items 20 and 22, certain states also employ special-purpose entities, which allow taxpayers to make charitable contributions to certain nonprofits (usually schools) while claiming a state tax credit for the contribution. While the taxpayer generally does not receive a federal charitable contribution deduction for the amount of the contribution for which they will receive a state credit, taxpayers often receive a much greater return in tax benefits dollar for dollar than contributions made outside of these special-purpose entity programs. In Pennsylvania, for example, the educational improvement and opportunity scholarship tax credits (EITC/OSTC) allow taxpayers to effectively divert state tax payments to donations to private schools, scholarship organizations, pre-K programs and other education initiatives.

To illustrate, using the Pennsylvania EITC/OSTC program, suppose a taxpayer contributes $50,000 to a special-purpose LLC, which in turn contributes the funds to the EITC/OSTC program. As a member of the LLC, at year end, the taxpayer would receive a K-1 from the entity reporting a Pennsylvania state tax credit for either 75 or 90 percent of the contribution, depending on whether they commit to making this contribution for one or two years, respectively. Assuming a two-year commitment, the taxpayer will receive a $45,000 credit on their Pennsylvania income tax return, reducing the tax owed by $45,000. In addition, the taxpayer would receive a federal income tax charitable contribution deduction for the remaining $5,000. Assuming a 37 percent federal tax bracket, this would result in a federal tax benefit (reduction in tax) of $1,850. Thus, on top of the $45,000 state tax benefit, the total tax benefit from a $50,000 contribution to an EITC/OSTC would be $46,850. By comparison, a contribution to a non-EITC/OSTC qualifying scholarship program would realize a tax benefit of only $18,500 (37 percent of $50,000).


EITC/OSTC contribution

“Normal” charitable contribution

Amount of contribution (A)



Pennsylvania tax credit (B)



Contribution for which no state credit is given (C=A-B)



Federal tax rate (D)



Federal tax savings (E=CxD)



Total federal and state tax benefit (B+E)




Tax-Efficient Investment Strategies

For 2023, the long-term capital gains and qualifying dividend income tax rates, ranging from zero percent to 20 percent, have increased incrementally, as shown below.

Long-Term Capital Gains Rate


Married Filing Jointly

Head of Household

Married Filing Separately


Up to $44,625

Up to $89,250

Up to $59,750

Up to $44,625


$44,626 - $492,300

$89,251 - $553,850

$59,751 - $523,050

$44,626 - $276,900


Over $492,300

Over $553,850

Over $523,050

Over $276,900


In addition, a 3.8 percent tax on net investment income applies to taxpayers with modified adjusted gross income that exceeds $250,000 for joint returns ($200,000 for singles). Here are some ways to capitalize on the lower rates as well as other tax planning strategies for investors.

Planning Tip—The capital gains rates remain largely untouched in 2023 with only small changes to the income thresholds for zero percent, 15 percent and 20 percent rates. Additionally, the zero percent capital gains rate for taxpayers in the lowest two tax brackets (10 or 12 percent) is preserved. Therefore, taxpayers should consider: (1) deferring income into 2024 in order to reduce 2023 income, and thus qualify for the zero percent capital gain rate in 2023, and/or (2) delaying the sale of appreciated long-term capital assets until 2024 if you will be within the 10 or 12 percent ordinary income tax brackets in 2024, which again will qualify use of the zero percent capital gain rate in 2024.

26. Maximize preferential capital gains tax rates. In order to qualify for the preferential lower capital gains tax rates of 20 percent, 15 percent and zero percent, a capital asset is required to be held for a minimum of one year. That is why it is paramount that, when you sell off your appreciated stocks, bonds, investment real estate and other capital assets, you are mindful of the asset’s holding period. If you have held the asset for less than one year, consider delaying the sale so that you can meet the holding period requirement (unless you have short-term losses to offset any potential gain). While it is generally unwise to let tax implications be your only determining factor in making investment decisions, you should not completely ignore them either. Also, keep in mind that realized capital gains may increase your AGI, which consequently may reduce your AMT exemption and therefore increase your AMT exposure―although this is to a much lesser extent than in prior years, given the increased AMT exemptions in recent years.

Planning Tip—In order to maximize the preferential effect of the spread between capital gain and individual income tax rates, consider receiving qualified employer stock options in lieu of a salary, converting ordinary compensation income into capital gain income.

27. Reduce the recognized gain or increase the recognized loss. When selling off any securities, the general rule is that the shares acquired first are the ones deemed sold first. However, if you opt to, you can specifically identify the shares you are selling when you sell less than your entire holding of any securities. By notifying your broker of the shares you wish to have sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you more control over the amount of your gain or loss and whether it is long- or short-term. A pitfall of the specific identification method is that you cannot use any different methods (e.g., average cost method or first in, first out method) to identify shares of that particular security in the future. Rather, you will have to specifically identify shares of that particular security throughout the life of the investment, unless you obtain permission from the IRS to revert to the first in, first out method.

Planning Tip—In order to utilize the specific identification method, you must request that the broker or fund manager sell the shares you identify and maintain records that include both dated copies of letters ordering your fund or broker to sell specific shares and written confirmations that your orders were carried out.

28. Harvest your capital losses. You should periodically review your investment portfolio to determine if there are any “losers” you should sell off. This year, even with many stocks up for the year, there are likely capital losses lurking somewhere in your portfolio. As the year comes to a close, so does your last chance to offset capital gains recognized during the year or to take advantage of the $3,000 ($1,500 for married separate filers) limit on deductible net capital loses, as potentially up $3,000 of net losses can be used to offset any ordinary income reported during the year. However, please be mindful of the wash-sale rule that could negate any capital losses realized, discussed later in item 31.

Planning Tip—Bracket management through harvesting of capital gains may be a good strategy depending on your situation. If you are expecting to be in a higher tax bracket in the future, you may wish to consider selling assets at a loss in the current yearyou will pay tax at a lower tax rate and get a step-up in tax basis. The effect is that you shift recognition of capital gain from a potential higher future rate to a current lower rate. If you happen to like that particular investment position, you can repurchase the same or similar assets to maintain the upside potential and you will not be affected by the wash-sale rules as noted in item 31.

29. Take advantage of Section 1202 small business stock gain exclusion. For taxpayers other than corporations, Section 1202 of the Internal Revenue Code allows for a potential exclusion of up to 100 percent of the gain recognized on the sale of qualified small business stock (QSBS) that is held by the taxpayer for more than five years, depending on when the QSBS was acquired. The shares of the company must have been acquired after September 27, 2010, and the gain eligible for the exclusion cannot exceed the greater of $10 million or 10 times the aggregate adjusted basis of QSBS stock sold during the year. As an alternative, if the stock is held for more than six months and sold for a gain, you can elect to roll over and defer the gain to the extent that new QSBS stock is acquired during a 60-day period beginning on the date of the sale.

Planning Tip—Be aware that if you are planning to harvest losses to offset gains, the Section 1202 taxable gain will be less than what you may have been anticipated. Accordingly, keep the Section 1202 gain exclusion in mind so you do not sell too many losers, resulting in the inability to claim all the losses harvested in 2023. Any excess loss would be carried forward to 2024 and succeeding tax years.

30. Beware of the “kiddie tax.” Generally, any investment income of a child in excess of $2,500 is taxed at the marginal tax rate of the child’s parents, under what is known as the “kiddie tax.” For kiddie tax purposes, a child is defined as someone that has not yet reached the age of 18 by the end of the year, or an 18 year old or a full-time student ages 19-23 with earned income not exceeding half of their support.

Planning Tip—A child's earned income (as opposed to unearned investment income) is taxed at the child's regular tax rates, regardless of amount. Therefore, business owners may consider hiring the child and paying a reasonable compensation to save taxes.
Observation—The net investment income tax (NIIT) is assessed on a taxpayer-by-taxpayer basis and is not subject to the kiddie tax rules unless the child exceeds the single-filer threshold for triggering NIIT. Therefore, there may still be possible savings in transferring assets to children subject to the kiddie tax if the parent is paying NIIT on the investment income. Of course, any time you are transferring assets, be certain to keep the gift tax in mind.
Planning Tip—Various measures can be taken to avoid or minimize the kiddie tax. Among those measures, consider investing a child’s funds in one or more of the following.
  • Owners of Series EE and Series I bonds may defer reporting any interest (i.e., the bond’s increase in value) until the year of final maturity, redemption or other disposition. (If held in the parent’s name and used for qualified higher education expenses, and assuming certain AGI requirements are met, the income is not taxed at all.)
  • Municipal bonds produce tax-free income (although the interest on some specialized types of bonds may be subject to the AMT).
  • Growth stocks that pay little dividends and focus more on capital appreciation should be considered. The child could sell them after turning 24 and possibly benefit from being in a low tax bracket. Selling them before then could convert a potential zero percent income tax on the gain into a 20 percent income tax.
  • Funds can be invested in mutual funds that concentrate on growth stocks and municipal bonds that limit current income and taxes. They may also limit risk through investment diversification.
  • Unimproved real estate that will appreciate over time and does not produce current income will limit the impact of the kiddie tax.
  • Section 529 plans offer investors the opportunity to experience tax-free growth, so long as distributions are used to fund qualified education expenses, discussed later at item 49. In addition, contributions to a 529 plan may qualify the donor for a deduction on his or her state income tax return.

31. Keep the wash-sale rules in mind. Frequently overlooked, the wash-sale rule makes it so that no deduction is allowed for a loss if you acquire substantially identical securities within a 61‑day period beginning 30 days before the sale and ending 30 days after the sale. Instead, the disallowed loss is added to the cost basis of the new security. However, there are ways to avoid this rule. For example, you could sell a security at a loss and use the proceeds to acquire similar but not substantially identical investments. If you desire to preserve an investment position and realize a tax loss, consider the following options:

  • Sell the loss securities and then wait 31 days to purchase the same securities. The risk in this strategy is that any potential appreciation in the stock that occurs during the waiting period will not benefit you.
  • Sell the loss securities and then reinvest the proceeds in shares of a mutual fund that invests in securities similar to the one you sold, or reinvest the proceeds in the stock of another company in the same industry. This approach considers an asset’s industry as a whole, rather than a particular stock. After 30 days, you may wish to repurchase the original holding. This method can reduce the risk of missing out on any potential appreciation during the waiting period.
  • Buy additional shares of the same security (double up), wait 31 days and then sell the original lot, thereby recognizing the loss. This strategy will allow you to maintain your position but also increases your downside risk.

Keep in mind that the wash-sale rule typically will not apply to sales of debt securities (such as bonds) since such securities usually are not considered substantially identical due to different issue dates, rates of interest paid and other terms.

Observation—The wash-sale rule applies directly to the investor, not each individual brokerage account they hold. Selling shares in one account with one broker and then buying them back with another broker is not a workaround solution. If trades are made in different accounts, the taxpayer is ultimately responsible for wash-sale tracking.

As discussed later at item 38, the IRS classifies cryptocurrencies as “property” rather than as securities, which means that wash-sale rules do not apply to them and that a taxpayer can sell a cryptocurrency at a loss and buy it back immediately without having to forego deducting the loss under wash-sale rules. This loss can then be used to offset other capital gains incurred during the tax year.

32. Lower your tax burden with qualified dividends. The favorable capital gain tax rates (20, 15 or zero percent) make dividend-paying stocks extremely attractive, since these preferential lower rates will remain intact for 2023. In recent years, several proposals attempted to increase this rate from 20 percent to 25 percent, or even the highest ordinary tax rate. Though these proposals ultimately failed, they may be considered in future years. However, the best course of action is to act based on current law and consider the makeup of your investment portfolio. Keep in mind that to qualify for the lower tax rate for qualified dividends, the shareholder must own the dividend-paying stock for more than 60 days during the 121-day period beginning 60 days before the stock’s ex-dividend date. For certain preferred stocks, this period is expanded to 90 days during a 181-day period.

Observation—While dividends paid by domestic corporations generally qualify for the lower rate, not all foreign corporation dividends qualify. Only dividends paid by so-called qualified foreign corporations, which include foreign corporations traded on an established U.S. securities market (including American depositary receipts), corporations organized in U.S. possessions and other foreign corporations eligible for certain income tax treaty benefits are eligible for the lower rates. Finally, beware of investments that are marketed as preferred stocks but are actually debt instruments, such as trust preferred securities or certain real estate investment trusts. Dividends received on these instruments are generally not qualified dividends and therefore do not qualify for the preferential capital gain tax rates.
Planning Tip—To achieve even greater tax savings, consider holding bonds and other interest-yielding securities inside qualified plans and IRAs while having stocks that produce capital gains and qualified dividend income in taxable accounts. In addition, as a taxpayer approaches retirement, it may be more beneficial to invest in equities outside of the retirement accounts so they may take advantage of the more favorable capital gains rates when they decide to cash in their investments to satisfy retirement-related expenses.

33. Consider tax-exempt opportunities from municipal bonds, municipal bond mutual funds or municipal ETFs. If you are in a high tax bracket, it may make sense to invest in municipal bonds. Tax‑exempt interest is not included in adjusted gross income, so deduction items based on AGI are not adversely affected. As long as your investment portfolio is appropriately diversified, greater weight in municipal bonds may be advantageous. However, be mindful of the AMT impact on income from private activity bonds, which is still a preference item for AMT purposes. In general, a private activity bond is a municipal bond issued after August 7, 1986, whose proceeds are used for a private (i.e., nonpublic) purpose. Accordingly, review the prospectus of the municipal bond fund to determine if it invests in private activity bonds. Anyone subject to the AMT, including those with incentive stock options, should avoid these funds.

Planning Tip—Tax-exempt interest is not included when calculating the net investment income tax, which, if you are already over the NIIT threshold, should be considered when determining your investment allocations as municipal funds will generate an even larger bang for your buck.
Planning Tip—Keep in mind that although interest rates for state and local municipal bonds are usually lower, they may still provide a higher rate of return after taxes than a taxable investment, depending on your tax rate. Consider the tax-equivalent yield, which factors tax savings into the municipal bond’s yield, for a more accurate comparison when determining if municipal bonds are advantageous for you.
Observation—Depending on what type of tax-exempt securities you invest in and where you live, you could generate interest that is double or triple tax-exempt if the bond is issued by the state or municipality in which you live. Double tax-exempt investment income is income that is not taxed at the federal or state level. If you live in a locality that also has a tax on investment income (like Philadelphia’s school income tax), you may also achieve triple tax-exempt income, which is when your tax-exempt interest is not taxed at the federal, state or local level.

34. Time your mutual fund investments. Before you invest in any mutual funds prior to February 2024, you will want to contact the fund’s manager to confirm if any dividend payouts attributable to 2023 are expected. If such payouts do take place, you may be taxed in 2023 on part of your investment. You need to avoid such payouts, especially if they include large capital gain distributions. Additionally, certain dividends from mutual funds are not “qualified” dividend income and therefore are subject to tax at the taxpayer’s marginal income tax rate, rather than at the preferential 20 percent, 15 percent or zero percent capital gains tax rates.

Illustration—Due to mutual fund values being based on the net asset value of the fund, if you were to receive a distribution of $25,000, the value of your original shares would decline by $25,000―the amount of the dividend payment. Furthermore, if you are enrolled in an automatic dividend reinvestment plan, the $25,000 dividend would purchase new shares, making the value of your fund to now be around the same as your original investment. The $25,000 dividend payout, however, will be subject to the preferential tax rates. If it is not a “qualified” dividend, it is subject to tax of up to 37 percent. If you had invested after the dividend date, you would own about the same amount of shares but would have paid no tax!

35. Determine if there is worthless stock in your portfolio. Stock that becomes worthless is deductible (typically as a capital loss) in the year that it becomes worthless. The loss is calculated based on your basis in the stock, though you may need a professional appraiser’s report or other evidence to prove the stock has no value. In order to avoid going through the appraisal process, consider selling the stock to an unrelated person for at least $1, or by writing a letter to the officers of the company stating that you are abandoning the stock. Doing so will eliminate the need for an appraiser’s report and further substantiates a loss deduction.

Observation—You may potentially not discover that a stock you own has become worthless until after you have already filed your tax return. In that case, you would be required to file an amended tax return for that year in order to claim a credit or refund due to the loss. For worthless stocks, you can amend a return for up to seven years from the due date of your original return or two years from the date you paid the tax, whichever is later. This seven-year lookback is an exception to the normal time frame allowed for amended returns, as the IRS is aware of the difficulty in determining when a security became truly worthless.

36. Consider the greatest tax exclusion hidden in your home. Federal law (and many, but not all, states) allows an individual to exclude, every two years, up to $250,000 ($500,000 for married couples filing jointly) of gain realized from the sale of their principal residence. To calculate the gain and support an accurate tax basis, maintain records of original cost, improvements and additions. The exclusion ordinarily does not apply to a vacation home. However, with careful planning, you may be able to apply the exclusion to multiple homes.

Illustration—If you convert your vacation home to your principal residence, you can then claim the allowable exclusion on your former vacation home. Of course, the former vacation home must be used as a principal residence for a minimum of two years. Establishing residency and use is critical to the success of this technique. Proper conversions result in an additional $250,000/$500,000 of tax‑free gain. However, you may still have taxable gain to the extent of depreciation previously claimed. The same strategy applies when two individuals plan to get married and each owns his or her own principal residence. If one of the residences is not sold before marrying, it may not qualify as a principal residence on a subsequent sale if the residency and use requirements are not met. The result could be a fully taxable sale. If a principal residence is sold before the two-year period is met, you may qualify for a partial gain exclusion if the sale was due to a change in workplace location, a health issue or certain unforeseeable events.
Observation—Gain on the sale of a principal residence cannot be excluded if the home was acquired in a like-kind exchange within five years from the date of sale. Therefore, an individual who owns a principal residence, which was originally acquired in a like-kind exchange, must wait five years before selling the property in order to take advantage of the home gain exclusion.
Planning Tip—For many individuals, their greatest asset is the appreciated equity in their home. As you advance toward retirement, it is important to consider your home as an investment. If you plan to downsize in later years (e.g., after the kids have left the nest), this exclusion can help you realize up to $250,000 ($500,000 for married couples) of the appreciated equity in your home tax-free. It is commonly regarded as the greatest tax benefit for most Americans.

37. Consider like-kind exchanges. A like-kind exchange provides a tax-free alternative to selling real property held for investment or for productive use in a trade or business. The traditional sale of property may cause recognition of any gain resulting in tax on the sale. Conversely, a like-kind exchange avoids the recognition of gain through the exchange of qualifying like-kind properties. The gain on the exchange of like-kind property is effectively deferred until the property received in exchange is sold or otherwise disposed. Since 2018, like-kind exchanges are only available for real property sales. If, as part of the exchange, other (not like-kind) property or money is received, gain must be recognized to the extent of the other property and money received. Losses cannot be recognized.

Observation—Although a like-kind exchange is a powerful tax-planning strategy, it includes certain risks. Simply put, it postpones the tax otherwise due on the property exchanged, but it does not eliminate it. The gain will eventually be recognized when the acquired property is sold. If the property is worth less than the tax basis in it, do not consider a like-kind exchange, as the loss would also be deferred under the like-kind exchange rules. Instead, sell it and take the loss now.
Planning Tip—Like-kind exchanges provide a valuable tax planning opportunity if:
  • You wish to avoid recognizing taxable gain on the sale of property that you will replace with like-kind property;
  • You wish to diversify your real estate portfolio without tax consequence by acquiring different types of properties using exchange proceeds;
  • You wish to take advantage of a very useful estate planning technique (when beneficiaries inherit like-kind property, their cost basis in the property is stepped up to the fair market value of the property on the date of inheritance); or
  • You would generate an alternative minimum tax liability upon recognition of a large capital gain in a situation where the gain would not otherwise be taxed. (The like-kind exchange shelters other income from the alternative minimum tax.)

38. Understand the tax implication of any transactions involving digital assets. Exchanges of digital assets, such as cryptocurrencies, can occur on either a traditional or a decentralized exchange (DEX). Traditional exchanges are centralized financial institutions that collect know-your-customer information from taxpayers such as ID, proof of income and proof of address. A DEX is a peer-to-peer marketplace where transactions occur directly between individuals, There is no intermediary that holds the cryptocurrency and the taxpayer can currently remain pseudonymous. Taxpayers who use traditional exchanges can now expect to receive documentation such as an Excel file or brokerage statement reporting cryptocurrency transactions that occurred throughout the year. On DEX platforms, taxpayers must track the transactions involving cryptocurrency themselves in order to accurately report their income.

Gains and losses from the sale (including use or disposition) of cryptocurrencies, just like the sale of stock, must be reported on your tax return. Proper recording of basis in cryptocurrency can significantly decrease the capital gains, which may be assessed in the future as stricter reporting requirements are expected to be on the horizon.

Potential Legislation Alert—This past August, the Treasury Department and IRS released proposed regulations on the sale and exchange of digital assets by brokers as part of the implementation of the Infrastructure Investment and Jobs Act. The regulations would result in increased requirements on brokers of digital assets to report certain sales and exchanges on a new Form 1099-DA beginning in 2026 for sales and exchanges occurring in 2025. Effectively, the regulations would align tax reporting on digit assets with existing rules for tax reporting on other assets, such as reporting sales of stock on Form 1099-B. For taxpayers who engage in transactions involving digital assets through a broker, this could simplify tracking the basis and calculating gains of digital asset transactions for the purpose of accurately reporting income.

A major change set forth in the proposed regulations would require DEXs that receive income from facilitating the transaction to collect know-your-customer information (the mandatory process of identifying and verifying individual information) and report transactions between users. Since these platforms were largely modeled to avoid collecting such information, this requirement would be a strenuous undertaking for current DEXs. In future years, individual taxpayers engaging with impacted DEXs will likely be required to sacrifice their pseudonymity or leave the platform.

Observation—In recent years the IRS has continuously assessed the digital asset ecosystem and has released various publications and guidance in response. Estimating the tax gap from digital asset transactions is difficult in nature and the IRS has not provided supporting data, but they estimate it may be as much as $50 billion per year. Other estimates speculate that the digital assets tax gap is much higher. Along with the IRS and Treasury’s other efforts to close the tax gap, digital assets will continue to be a focal point for increased regulations and monitoring. We will continue to monitor the situation and advise as more information becomes available.
Planning Tip—Not only do you have to recognize a gain or loss when you exchange virtual currency for other types of currencies, you also have to recognize the gain or loss upon exchange of the virtual currency for other property and/or services. So if you buy something online with virtual currency, that is a reportable transaction; if you purchase a subscription with virtual currency, that is also a reportable transaction. Because virtual currency is treated as property and not currency for tax purposes, any exchange for any type of value is a reportable tax event. Any movement of any virtual currency is required to be tracked and reported. In short, using virtual currency like a regular currency is not recommended because it substantially increases the complexity of taxpayers’ filings and can increase tax liability. Speculate on it like a normal investment (if you dare). Your tax accountant may thank you with a smaller bill for your tax return.
Planning Tip—The IRS issued preliminary guidance related to the treatment of certain nonfungible tokens (NFTs) as collectibles, which would result in higher tax rates levied on certain NFT sales than others. NFTs are defined by the IRS to be “a unique digital identifier that is recorded using distributed ledger technology and may be used to certify authenticity and ownership of an associated right or asset.” An NFT can give the holder the right to a digital file, but it can also provide the holder a right to an asset that is not a digital file, such as ownership of a physical item or the right to attend an event. Until further guidance is issued, the IRS intends to determine an NFT’s treatment by using a “look-through analysis.” Under this method, an NFT is treated as a collectible if the specific NFT’s associated right or asset falls under the IRS’ existing Section 408(m) definition of collectibles. For example, an NFT that certifies ownership of a physical gem would be considered a collectible because gems are considered collectibles under section 408(m). However, an NFT certifies the right to a plot of land in a virtual space would not be considered a collectible. Therefore, under this preliminary guidance, gains from the sale of the gem NFT would be taxed at the typically higher rate for collectibles, while the sale of the land NFT would be taxed at a typically lower capital gains rate. While this guidance is subject to change, considering the specifics of an NFT before purchasing could lead to a lower tax burden in the future.
Planning Tip—A Chief Counsel Advice memorandum released in January 2023 addresses the applicability of loss deduction rules in cases when taxpayers experience a substantial decline of value in cryptocurrency, likely issued in response to taxpayers that held digital assets on now bankrupt exchanges like FTX. Although the memorandum is not binding and is subject to change without notice, it provides insight into possible positions the IRS may take while other agency guidance is not available. The IRS explains that substantial reduction in value would be eligible for a loss deduction only if there is evidence of a closed and completed transaction fixed by identifiable events and actually sustained during the taxable year. Therefore, simply holding cryptocurrency while waiting for a bankrupt exchange to process itself through the courts does not entitle the taxpayer to a loss deduction on their tax return. Individual taxpayers should continue maintaining records and standing by for the results of the exchange’s bankruptcy proceedings, as tax implications are contingent on the outcomes of these proceedings.

39. Determine your level of participation in activities to either avoid or qualify for passive activity loss treatment. In general, losses from a passive activity are subject to more limitations (and therefore are less beneficial) than active losses. Passive activities generally occur when the taxpayer does not materially participate in the activity. The IRS regulations and statutory authority lay out a number of factors that determine whether an activity should be considered passive. Typically, when an individual spends more than 500 hours participating in an activity during the year, the activity will not be considered passive. There are also other exceptions that allow passive activities to be classified as active, including participation during five of the preceding 10 tax years or having spent more than 100 hours on the activity during the year, which equals or exceeds the involvement of any other participant. You may also want to generate passive income to utilize passive losses, which would otherwise be suspended.

As for real estate professionals, eligible taxpayers may deduct losses and credits from rental real estate activities in which they materially participate since they will not be treated as passive and may be used to reduce nonpassive income. For these purposes, an eligible taxpayer spends more than 750 hours of services during the tax year in real property trades or businesses. In addition, a taxpayer’s personal use, or rental to others, of a vacation home during the last few days of the year may have a substantial tax impact.

40. Consider the benefits of selling your passive activities to trigger use of suspended losses. Taxpayers can use passive losses to offset nonpassive income in the year in which they dispose of or abandon their entire interest in the activity in a taxable transaction, whether the transaction results in a gain or a loss.

Planning Tip—If you have adequate capital gains, selling a passive activity for a capital loss will allow you to use this capital loss against the capital gains, while also deducting prior year suspended losses from that passive activity. If the sale results in a gain, this may still be a sound strategy since the gain will be taxed at a rate lower than the ordinary tax rate permitted for the passive loss. Once again, crunch the numbers to determine the tax impact.

41. Make the most of your pass-through entities’ losses by ensuring you have adequate tax basis in your S corporations or partnerships. Losses can only be claimed from a flow-through entity if you have sufficient tax basis in the entity. In order to increase your basis and potentially free up losses, you may wish to contribute cash to the entity by either increasing your equity or debt in the venture. Keep in mind that loans made by a third-party lender to an S corporation and guaranteed by an S corporation shareholder do not increase the shareholder’s basis. The loan must be made directly from the S corporation shareholder to the S corporation in order to increase his or her basis.

Planning Tip—Make sure you retain records of the amount you have at risk in each of your businesses or for-profit activities. This will allow the use of losses and deductions incurred in the activity and avoid unexpected recapture. If your at-risk amount approaches zero, be proactive and consider ways to increase your basis ahead of time and weigh that against the economic exposure involved.

Planning for Retirement

42. Take advantage of SECURE Act 2.0. The SECURE Act, enacted into law in late 2019, altered the rules around how you can save and withdraw money from your retirement accounts. In late December 2022, President Joe Biden signed into law the Consolidated Appropriations Act, which included additional provisions and new laws thus titled SECURE Act 2.0. While some of the laws and provisions will take place in 2023, most of SECURE Act 2.0 will take effect down the road.

Postponing Required Minimum Distributions

Previously required minimum distributions (RMDs) started at age 72―but under current law, RMDs will now begin at 73 for those who obtain the age of 72 after December 31, 2022. The legislation will further shift the required start date for distributions to age 75 in 2033.

Requiring Automatic Enrollment in 401(k) Plans

For new 401(k) or 403(b) plans adopted after December 31, 2024, employees will be automatically enrolled in their employer’s retirement plans, though they may choose to opt out. For retirement plans already existing as of that date, automatic enrollment would remain optional, as it is today. Exemptions for this new provision include small businesses, government and church plans.

Decreasing the Penalty for Failure to Take an RMD

Under previous law, failure to comply with RMD requirements results in an excise tax equal to 50 percent of the year’s required distribution amount. Beginning in 2023, SECURE Act 2.0 reduces this penalty to 25 percent of the year’s required distribution amount. The penalty is then further reduced to 10 percent if the missed RMD is found and corrected within a two-year window of when it originally should have been taken.

Allowing Additional Catch-up Contributions for Older Workers

Catch-up contributions currently allow people age 50 and older to set aside additional dollars over the standard maximum contributions to workplace retirement plans. Beginning in 2025, another form of “catch-up contribution” would be created for those ages 60 to 63. Upon achieving this age, individuals would be allowed to add $10,000 or 150 percent of the regular catch-up amount to a 401(k) or 403(b) plan.

Restricting Repayment Period for Early Withdrawals for Birth or Adoption Expenses

The 2019 SECURE Act waived the 10 percent penalty for early withdrawals from a workplace savings plan to meet birth or adoption expenses, provided those expenses are repaid to the plan. However, it did not put a timeline on when repayment had to occur. Under SECURE Act 2.0, the law now imposes a deadline of three years from the date of withdrawal to repay the plan in full to avoid any penalties, beginning in 2024.

Expanding the Ability to Make Penalty-Free Withdrawals

SECURE Act 2.0 provide for penalty-free withdrawals from a workplace savings plan for those who experience domestic abuse. A withdrawal can be made up to the lesser of $10,000 or 50 percent of the account balance without being subject to the 10 percent penalty for early distribution. The distribution is subject to tax, but you can be eligible for a refund if repaid over three years.

43. Participate in and maximize payments to 401(k) plans, 403(b) plans, SEP (simplified employee pensions) plans, IRAs, etc. These plans enable you to convert a portion of taxable salary or self‑employed earnings into tax-deductible contributions to the plan. In addition to being deductible themselves, these items increase the value of other deductions since they reduce AGI. Deductible contributions to IRAs are generally limited to $6,500 in 2023, while substantially higher amounts can be contributed to 401(k) plans, 403(b) plans and SEPs. For 2023, the deduction for IRA contributions starts being phased out if you are covered by a retirement plan at work and your AGI exceeds $73,000 for single filers and $116,000 for married joint filers. In 2023, $22,500 may be contributed to a 401(k) plan as part of the regular limit of $66,000 that may be contributed to a defined contribution (e.g., money purchase, profit‑sharing) plan. This limit includes both employer and employee contributions. These limits are reflected in the table below. Don’t forget that additional catch-up contributions are allowed for those taxpayers age 50 and above, as noted in the table.

IRAs can be formed and contributed to as late as April 15, and contributions can be made to an existing IRA on the due date of your return, including extensions. In addition, SEPs can be established and contributed to as late as the due date of your return, including extensions, or as late as October 15, 2024, for tax year 2023.

Planning Tip—Often, teenagers have summer or part-time jobs to earn extra spending money, while learning responsibility and valuable life skills. Retirement is usually the last thing on these teens’ minds. Since these jobs generate compensation, these teenagers are eligible to make either Roth or traditional IRA contributions up to the lesser of $6,500 or 100 percent of their compensation in 2023. A particularly generous parent, grandparent or other family member may wish to contribute to the child’s IRA by gifting the child the contribution, keeping in mind the gift tax, if any. A gift of $6,500 to a Roth IRA now will be worth significantly more, tax-free, when the child retires in 50 years or so.

A 401(k) plan can also be converted into a Roth IRA, but there are potential tax considerations. Please see item 46 for more information.

Observation—Roth 401(k) accounts can be established to take after-tax contributions if the traditional 401(k) plan permits such treatment. Some or all of the traditional 401(k) contributions can be designated by the participant as Roth 401(k) contributions, subject to the maximum contributions that already apply to traditional 401(k) plans (including the catch-up contributions), as reflected in the table below. The Roth 401(k) contributions are not deductible, but distributions from the Roth 401(k) portion of the plan after the participant reaches age 59½ are tax-free.

Annual Retirement Plan Contribution Limits

Type of plan




Traditional and Roth IRAs

Catch-up contributions (ages 50-plus) for traditional and Roth IRAs







Roth and traditional 401(k), 403(b) and 457 plans

Catch-up contributions (ages 50-plus) for 401(k), 403(b) and 457 plans










SIMPLE plans

Catch-up contributions (ages 50-plus) for SIMPLE plans







SEPs and defined contribution plans*




*Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2023, the limit as adjusted for inflation is $330,000.

Planning Tip—As long as one spouse has $13,000 of earned income in 2023, each spouse can contribute $6,500 to their IRAs. The deductibility of the contributions depends on the AGI reflected on the tax return and on whether the working spouse is a participant in an employer-sponsored retirement plan. Keep in mind that an individual is not considered an active participant in an employer-sponsored plan merely because their spouse is an active participant for any part of the plan year―so it is possible that contributions to the working spouse’s IRA are nondeductible while contributions to the nonworking spouse’s IRA are deductible. In addition, catch‑up IRA contributions, described above, are also permitted.

44. Take advantage of changes to retirement contribution rules. With the passage of the original SECURE Act in 2019, there is no longer an age limit for individuals who choose to contribute toward a traditional IRA. Before 2020, those who turned 70½ during the taxable year were ineligible to make any further contributions to their retirement account. Keep in mind that in order to contribute to a traditional IRA, a taxpayer needs to have earned income from a job or self-employment, so this only affects those seniors that are continuing to work after age 70½. The contribution limit for IRAs has increased to $6,500 ($7,500 for those age 50 and over), and the deductibility of contributions may be limited based on income or your eligibility for an employer plan.

45. Avoid potential penalties for not taking a required minimum distribution. Due to the passage of the SECURE Act 2.0, if you turned 72 after December 31, 2022, you are not required to take an RMD from your account for tax year 2023. If you turned 73 during 2023, you have until April 1, 2024, to take your first RMD. If you were 73 or older during 2023, you must take your RMD for tax year 2023 by December 31, 2023. The penalty for not taking an RMD is excessive: 25 percent of the required distribution that is not taken by year-end.

Observation—Just to reiterate, if you turned 72 at any time during 2023, you are not required to take an RMD for 2023. You will be required to take an RMD in 2024 once you obtain the age of 73, but the RMD can be delayed until April 1, 2025.

Certain individuals still employed at age 73 are not required to begin receiving minimum required distributions from qualified retirement plans (401(k), profit sharing, defined benefit plans, 403(b)s, etc.) until after they retire, representing another often overlooked method of deferring tax on retirement savings.

46. Maximize wealth planning through Roth conversions. Converting a traditional retirement account such as a 401(k) or IRA into a Roth 401(k) or Roth IRA will create taxable income upon conversion and allow tax-free distributions in retirement. There are many good reasons (and a few bad ones) for converting a 401(k) or traditional IRA to a Roth account. Good reasons include:

  • Your assets in the traditional IRA currently may have depressed in value;
  • You have special and favorable tax attributes that need to be consumed such as charitable deduction carryforwards, investment tax credits and net operating losses, among others;
  • You expect the converted amount to grow significantly, and tax-free growth is desired;
  • Your current marginal income tax rate is likely lower than at the time of distribution (retirement);
  • You have sufficient cash outside the 401(k) or traditional IRA to pay the income tax due as a result of the conversion;
  • The funds converted are not required for living expenses or other needs for a long period;
  • You expect your spouse to outlive you and will require the funds for living expenses; and
  • You expect to owe estate tax, as the income tax paid in connection with the conversion would reduce the taxable estate.

If you decide to rollover or convert from a 401(k) or traditional IRA to a Roth account and you also expect your AGI and tax bracket to remain more or less constant, you should consider staggering the total amount you plan to shift over a period of years. For example, a taxpayer who plans to convert a total of $185,000 from a regular IRA to a Roth IRA should consider converting $37,000 per year for five years. This strategy may prevent the conversion from pushing a taxpayer into a higher tax bracket, since the conversion is fully taxable on the amount converted.

The IRS recently released inflation adjusted income tax brackets for tax year 2024, which could keep taxpayers in the same tax bracket while potentially earning more income. You may want to consider holding off until 2024 to make a larger rollover given the taxable income bracket increase for inflation.

Keep in mind that a conversion cannot be recharacterized afterward, so careful planning is needed.

Planning Tip—Before transferring assets to a Roth account, carefully analyze which one would provide the greater benefit and consider the impact of the rollover or conversion on your effective tax rate. Taxpayers should consider whether they have unrealized losses in brokerage accounts that can be harvested to lower their taxable income and reduce the “hit” from a Roth conversion.
Planning Tip—Many taxpayers are prevented from making a Roth IRA contribution due to their modified AGI. For 2023, Roth contributions are prohibited for couples filing jointly whose modified AGI exceeds $228,000 and for singles and head of household filers whose AGI exceeds $153,000. However, this limitation can be worked around by making a so-called backdoor Roth contribution. A taxpayer can make nondeductible contributions to a traditional IRA and subsequently convert these contributions into a Roth IRA without being subject to the AGI limitation. Any income earned on the account between the time it was a nondeductible IRA and the time of conversion to a Roth would be required to be picked up as income, though many taxpayers contribute to the traditional IRA and convert to the Roth within a short period of time to avoid this issue.

One potential downside of a backdoor Roth conversion is that the conversion may increase modified AGI for purposes of the net investment income tax, subjecting investment income to a 3.8 percent tax. While the conversion will create taxable income, that income would not be subject to the NIIT; however it could effectively subject other investment income to that tax. Be sure to discuss a possible conversion with us or your qualified tax professional to determine the holistic impact.

47. Make charitable contributions directly from 2023 IRA distributions. Current law provides an exclusion from gross income for certain distributions of up to $100,000 from a traditional IRA when contributed directly to a qualified tax-exempt organization to which deductible contributions can be made. For married couples, each spouse can make a $100,000 distribution from their respective retirement account for a potential total of $200,000 for year 2023. Under the SECURE 2.0 Act, the annual contribution limit in future years is indexed for inflation. This special treatment applies only to distributions made on or after the date the IRA owner reaches age 70½, and the distribution must be made directly from the IRA trustee to the charitable organization. Distributions that are excluded from income under this provision are not allowed as a deduction. Qualified charitable distributions (QCDs), as these are called, may be especially beneficial for those charitably minded taxpayers who claim the standard deduction or whose taxable Social Security benefits are affected by AGI thresholds.

The SECURE 2.0 Act also allows IRA owners age 70½ to make a one-time election to transfer a QCD of $50,000 for 2023 (the contribution limit is indexed for inflation in future years) to a split-interest entity, such as a charitable remainder unitrust, charitable remainder annuity trust or charitable gift annuity. The split-interest entity is required to pay a fixed percentage of 5 percent or greater. Payments received from the split-interest entity or taxable as ordinary income.

Observation—By excluding the IRA distributions from income, QCDs also result in a lower AGI, which may make income or deductions affected by AGI (such as medical deductions) more valuable and may also eliminate or reduce the amount of Social Security benefits subject to tax. Additionally, by excluding income with a QCD, you may also expand your eligibility for certain deductions and credits that might be otherwise phased out due to higher income.
Planning Tip—Qualifying charitable distributions can be used to satisfy RMD requirements, thus allowing taxpayers to exclude income they would otherwise be required to include. It is also important to note that while the SECURE 2.0 Act increased the age for the initial RMD to 73 for year 2023, and again to 75 starting January 1, 2033, the minimum age to make a QCD remains 70½. As a practical matter, however, such charitable distributions may not be made to a private foundation or donor-advised fund.

48. Plan to stretch. The SECURE 2.0 Act maintained the SECURE Act’s partial elimination of the “stretch IRA” strategy, whereby IRA owners would utilize their retirement accounts as a means to transfer wealth to the next generation. For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. This strategy is particularly beneficial for taxpayers with Roth IRAs, as beneficiaries do not have to pay taxes on withdrawals from the Roth.

For deaths of plan participants or IRA owners beginning in 2020, distributions to most nonspousal beneficiaries are generally required to be distributed within 10 years following the plan participant or IRA owner’s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Planning Tip—In order to avoid the 10-year rule, distributions must be made to either:
  • The surviving spouse of the plan participant or IRA owner;
  • A child of the plan participant or IRA owner who has not reached the age of majority;
  • A chronically ill individual; or
  • Any other individual who is not more than 10 years younger than the plan participant or IRA owner.

Distributions to any beneficiaries who qualify under any of these exceptions may generally take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020). Whether one is in the process of naming beneficiaries for their IRA or receiving payments from an inherited IRA, a knowledgeable tax adviser can assist in ensuring the required distributions are taken while minimizing the tax due in light of other, nontax concerns, such as need for cash flow.

Observation—The SECURE Act initially created confusion regarding RMD requirements for beneficiaries of inherited IRAs owned by decedents who began RMDs. The IRS has now clarified that if the IRA owner began taking RMDs before prior to death, the beneficiary is required to continue taking RMDs during the 10-year period. Prior to this clarification, distributions in years one through nine were allowed, but not required.

Planning for Higher Education Costs

Many tax-saving opportunities exist for education-related expenses. If you or members of your family are incurring these types of expenses now or will be in the near future, it is worth examining them. Here are some strategies to consider as year-end approaches.

49. Retain control and plan ahead for tax-free growth with 529 qualified tuition plans. Section 529 plans are well known for their tax benefit: distributions of contributions and earnings are tax free when utilized for qualified higher education expenses. However, another feature of Section 529 plans that taxpayers usually overlook is the ownership and control of the plan lies with the donor (typically the parent or grandparent of the beneficiary student) and not with the beneficiary. Having donor control and ownership means the plan is not considered an asset of the student for financial aid purposes, generally resulting in higher financial aid.

While many states allow deduction on the year of contributions, 529 plan contributions, which are made on an after-tax basis, do not provide federal tax savings. However, the more significant federal tax benefit is that contributions and earnings on contributions that are subsequently distributed for qualified higher education expenses (including tuition, room and board, and other costs) at accredited schools anywhere in the United States are free of federal income tax and may be free of state income tax. Since 2018, 529 plan owners can use tax-free distributions for up to $10,000 of eligible expenses at elementary and secondary schools, in addition to colleges and universities. Since the SECURE Act was passed in December 2019, tax-free distributions can now also be used to pay for eligible expenses related to an apprenticeship program, in addition to higher education expenses. In addition, the SECURE Act allows up to $10,000 of distributions to pay principal or interest on a qualified education loan of the beneficiary or a sibling of the beneficiary.

To the extent that distributions are not for qualified higher education expenses, regular income tax plus a 10 percent penalty may apply to the earnings portion of the distribution. As contrasted with the other education strategies discussed below, contributions may be made regardless of the donor’s AGI.

An election can also be made to treat a contribution to a 529 plan as having been made over a five-year period. Consequently, for 2023, a married couple can make a $170,000 contribution ($180,000 beginning in 2023) to a 529 plan without incurring any gift tax liability or utilizing any of their unified credit since the annual gift exclusion for 2023 is $17,000 per donor (increasing to $18,000 for 2024) and the contribution can be split with the donor’s spouse. It is important to note that additional gifts made in the five-year period to the same recipients have a high chance of triggering a gift tax filing obligation.

Planning Tip—If your resident state allows a deduction, make a contribution to a 529 plan and immediately take a qualified distribution to pay for college tuition. In effect, this will provide you with a discount on college costs at your marginal state income tax rate.
Observation—Currently, more than 30 states and the District of Columbia allow a deduction for Section 529 plan contributions. Please make sure you have the appropriate 529 plan, as many states are particular about what type of plan can lead to a state deduction. For example, New York only allows deductions for 529 plans set up under New York law. If you have changed residency since setting up a 529 plan, review your options before contributing.

In general, to the extent that contributions to a 529 plan are not distributed for the benefit of the beneficiary, the account may be transferred to a member of the beneficiary’s family, penalty-free. As long as the amounts transferred are used for qualified education expenses, they will still be free from federal income tax, as noted above. However, any change in beneficiary may be subject to the federal gift tax, so proper planning considerations should still be reviewed.

Planning Tip—Currently, students are required to report distributions from a grandparent-owned 529 plan on their Free Application for Federal Student Aid (FAFSA), with 50 percent of the gift being counted as available funds for college, thus reducing the amount they receive in financial aid. Looking forward, for the 2024-25 school year, students will no longer be required to report distributions from grandparent-owned 529 plans on their FAFSA forms. If planning to give to a grandchild in the future, it can be favorable to set up and contribute to a 529 plan for your grandchild now.
Planning Tip—It is important to plan for 529 plan distributions in coordination with the education credits discussed next. An individual's qualifying higher educational expenses (for determining the taxable portion of 529 plan distributions) must be reduced by tax-free education benefits (such as scholarships and employer-provided education assistance) plus the amount of the qualifying expenses taken into account in computing an education credit (whether allowed to the taxpayer or another tax-paying individual). To avoid any unexpected income recognition, it is important to talk to your tax adviser and perform a comprehensive review before any 529 plan distributions.
Planning Tip—You may even set up a Section 529 plan for yourself since there is no age limit to who can open, contribute to or withdraw from a 529 account. This means that you can use the plan to save for your own education expenses, even if you are not a child or grandchild of the account owner.

50. Take advantage of education credit options. If you pay college or vocational school tuition and fees for yourself, your spouse and/or your children, you may qualify for either the American opportunity tax credit or the lifetime learning credit to offset the cost of education. These credits reduce taxes dollar-for-dollar, but begin to phase out when 2023 modified AGI exceeds certain levels. The chart below provides a summary of the phaseouts.

2023 Education Expense and Credit Summary

Tax benefit

Single filers (not including married filing separately)

Joint filers

Maximum credit/deduction/contribution

American opportunity tax credit

$80,000 - $90,000

$160,000 - $180,000

$2,500 (credit), up to 40% of the credit is refundable ($1,000)

Lifetime learning credit

$80,000 - $90,000

$160,000 - $180,000

$2,000 (credit)

Student loan interest deduction

$75,000 - $90,000

$155,000 - $185,000

$2,500 (deduction)

Coverdell education savings account

$95,000 - $110,000

$190,000 - $220,000

$2,000 (contribution)


Planning Tip—The credits are allowed for tuition paid during the year for education received that year or during the first three months of the next year. Consequently, consider paying part of 2024 spring tuition at the end of 2023 if you have not maximized the credit or reached the above income thresholds.
Planning Tip—Parents can shift an education credit from their tax return to the student’s tax return by electing to forgo the child tax credit for the student and not claiming the child as a dependent. This strategy is a common move for high-income parents whose income prevents them from claiming the education credit or from receiving any benefit from the child tax credit. To benefit from this strategy, however, the student must have sufficient income―and therefore tax liability―to take advantage of the credit. Credits are allowed on a student’s tax return even if parents are the ones who pay for the qualified education expenses. It might be necessary to shift income to the student as well, perhaps through gifts of appreciated property (that the student then sells at a gain) or employment in a family business, as discussed in item 95. However, be careful about the impact on a student’s financial aid―shifting income to a student can reduce financial aid amounts and eligibility.
Planning Tip—Advanced high school students and high school students taking college-level classes (including dual credit classes) may be eligible for an education credit. For the American opportunity tax credit, the student must be enrolled at least half time in a post-secondary degree program. For the lifetime learning credit, the student must also be enrolled in one or more courses that are part of a degree program, but there is no course workload requirement. Therefore, it may be easier for the student to qualify for the lifetime learning credit. In any case, the course(s) must count toward a degree to qualify. Perhaps the best way to determine this is to simply ask the educational institution. Preferably, the institution’s answer should be in writing and saved with your tax materials.

51. Match student loan payments with retirement contributions. The CARES Act gave temporary payment relief to borrowers of certain qualifying federal student loans. This pause has now ended and payments for student loans have resumed.

If you paid interest on a qualifying federal student loan, an “above the line” deduction of up to $2,500 is allowed for interest due and paid in 2023. Note that the deduction is not allowed for taxpayers electing the filing status of married filing separate. Additionally, a taxpayer who can be claimed as a dependent on another's return cannot take the deduction. The deduction is phased out when AGI exceeds certain levels. See chart above.

Starting in 2024, a provision of the SECURE 2.0 Act allows employers to make matching contributions to a defined contribution plan based on the amount of an employee’s student debt repayments. Employers rely on employees to certify the amount of qualified student loan payments made. The matching contribution is then calculated as if the employee elected to contribute the loan payment amount to the plan by payroll deduction, even though the employee does not make any elective contributions to the plan.

Planning Tip—An amendment to the employer’s retirement plan agreement may be required to take advantage of this new provision allowing matching contribution for qualified student loan payments.

52. Fund contributions to a Coverdell education savings account. A Coverdell education savings account (ESA) is a tax-exempt trust or custodial account organized exclusively in the United States solely for paying qualified education expenses for the designated beneficiary of the account. At the time the trust or account is established, the designated beneficiary must be under 18 (or a special needs beneficiary). Contributions to a Coverdell ESA must be made in cash and are not tax deductible; however, the earnings grow on a tax-deferred basis. The maximum total annual contribution is limited to $2,000 per beneficiary per year, and the contribution is phased out when the modified AGI is between $190,000 and $220,000 for joint filers and $95,000 and $110,000 for single filers.

Distributions from Coverdell ESAs are excludable from gross income to the extent that the distributions do not exceed the qualified education expenses incurred by the designated beneficiary, less any amounts covered by grants or scholarships and credits received from lifetime learning or American opportunity tax credits, as discussed at item 50 above. Tax-free withdrawals can be made for qualified expenses, which also include kindergarten through grade 12 and higher education expenses. If distributions exceed qualified expenses, a portion of the distributions is taxable income to the designated beneficiary. Furthermore, to the extent that distributions are not used for educational expenses, a 10 percent penalty applies.

Planning Tip—Since Coverdell ESAs provide the same tax benefit as a 529 plan, you may wish to consider converting the Coverdell to a 529 and take a state tax deduction, if available in your state.
Observation—Many taxpayers do not understand the differences between a Coverdell ESA and a 529 plan. Differences range from who sponsors the plan, contribution limits, income restrictions for contributions, investment flexibility, and when and how funds must be used. If you are deciding between the two, please reach out to your tax adviser for guidance.

53. Consider education benefits from financial aid and various loan repayment plans. While the Biden-Harris administration’s original plan to forgive some federal student loans (up to $20,000) was shut down by the Supreme Court in June 2023, they have set their focus on other areas of student debt relief. In October 2023, they announced the approval of an additional $9 billion in debt relief fixes. These fixes are mainly for income-driven repayment plans (IDR) and the public service loan forgiveness (PSLF) plan, but also includes automatic relief for borrowers that have permanent and total disabilities. For many years, millions of individuals in these plans were unable to access the student debt relief they were eligible for. As of October 2023, the administration had approved roughly $127 billion in student debt forgiveness, including IDR plans, PSLF plans, borrowers with certain disabilities and some borrowers who were misled by their schools. To learn more about these plans and see whether you qualify, visit the Federal Student Aid office’s website.

Planning Tip—While the original hope of having federal student loan debt cancelled has been struck down, it is still worthwhile to pay attention to the various loan repayment plans and whether they could potentially benefit you and your situation. Depending on your individual situation, some plans could reduce your monthly payment to as little as zero dollars.

Strategies for Saving

54. Use an achieving a better life (ABLE) account to cover qualified disability expenses. An ABLE account is a tax-advantaged savings vehicle that can be established for a designated beneficiary who is disabled or blind. Only one account is allowed per beneficiary, though any person may contribute. Contributions to an ABLE account are not deductible on the federal tax return, but some states allow a deduction for contributions to the plan. Earnings in the account grow on a tax-deferred basis and may be distributed tax-free if used for qualified disability expenses, including basic living expenses such as housing, transportation and education, as well as medical necessities. If distributions are used for nonqualified expenses, those are subject to income tax plus a 10 percent penalty tax.

Total annual contributions by all persons to the ABLE account cannot exceed the gift tax exclusion amount ($17,000 for 2023, $18,000 for 2024), though additional annual contributions may be possible if the beneficiary is employed or self-employed. An allowed rollover from the 529 college savings account to the ABLE account is considered a contribution and counts toward the maximum allowed annual limit. States have also set limits for allowable ABLE account savings. If you are considering an ABLE account, contact us for further information.

Observation—We understand that people sometimes fear giving because they do not want a disabled individual to lose a benefit they are currently entitled to receive. While ABLE accounts have no impact on an individual's Medicaid eligibility, balances in excess of $100,000 are counted toward the Supplemental Security Income (SSI) program's $2,000 individual resource limit. Thus, an individual's SSI benefits are suspended, but not terminated, when their ABLE account balance exceeds $102,000 (assuming the individual has no other assets). In addition, distributions from an ABLE account used for housing or nonqualified expenses may affect SSI benefits if the money is not spent within the same month the withdrawal is made. It is important to keep these potential nontax ramifications in mind before making a contribution.

55. Achieve tax savings via health and dependent care flexible spending accounts (IRC Section 125 accounts). These so-called “cafeteria” plans enable employees to set aside funds on a pretax basis for (1) unreimbursed qualified medical expenses of up to $3,050 per year ($3,200 in 2024); (2) dependent care costs of up to $5,000 per year, per household; and (3) adoption assistance of up to $15,950 per year. Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes (at maximum rates as high as 13.3 percent), resulting in a tax savings of as much as 57.95 percent. Paying for these expenses with after‑tax dollars, even if they meet various AGI requirements, is more costly under the current tax rate structure. Since many restrictions apply, such as the “use it or lose it” rule, review this arrangement before making the election to participate.

Illustration—The tax savings resulting from participation in flexible spending accounts (FSA) are often significant. Assume a married couple with one child maximizes the contribution for uncovered medical costs ($3,050 from each FSA, totaling $6,100) and also contributes $5,000 for qualified day care expenses. Assuming a 37 percent tax rate, the family creates a tax savings of about $4,956―$4,107 in income taxes and $849 in Social Security/Medicare taxes, not counting any potential reductions in state income taxes. However, if the married couple chooses not to contribute to the dependent care flexible spending account and instead claims the dependent care credit on the tax return, they would lose out on the tax savings on Social Security/Medicare taxes. Also, they can only claim up to $3,000 in qualified dependent care expenses for the child.
Planning Tip—Section 125 plans often adopt a two-and-a-half month grace period (to March 15, 2024) during which employees who participate in the plan can use up any unspent funds on new qualified expenses incurred in early 2024 during the grace period. Accordingly, this can potentially reduce employee contributions that would otherwise be subject to forfeiture. You should check with your employer’s benefits department to determine if your employer has adopted any such extension provisions, as plans are not required to offer a grace period.
Planning Tip—Married couples who both have access to FSAs will also need to decide whose FSA to use. If one spouse’s salary is likely to be higher than the Federal Insurance Contributions Act (FICA) wage limit ($160,200 for 2023) and the other spouse’s salary will be less, the one with the smaller salary should fund as much of the couple’s FSA needs as possible. This is because FSA contributions by the spouse whose income is higher than the FICA wage limit will not reduce the 6.2 percent Social Security tax portion of the FICA tax, but FSA contributions by the other spouse will. This planning tip also applies to health savings accounts mentioned below.

For example, if John’s salary is $170,000 and Mary’s salary is $50,000, FSA contributions of $5,000 by John will not reduce his Social Security tax (since, even reflecting the FSA contributions, his Social Security wages exceed $160,200), while FSA contributions of $5,000 by Mary will save her approximately $300 in Social Security tax.

56. Reach your retirement goals with a health savings account (IRC Section 223 account). Health savings accounts (HSAs) are another pretax medical savings vehicle that are currently highly favored in the marketplace. Taxpayers are allowed to claim a tax deduction for contributions to an HSA even if they cannot itemize medical deductions on Schedule A. HSAs can also work alongside your 401(k) or IRAs to accomplish your retirement goals. Some key HSA elements include: (1) HSA contributions are deductible, subject to annual limits; (2) employer contributions to your HSA are not treated or taxed as income to you; (3) interest or other earnings on your HSA account accrue tax-free, provided there are no excess contributions; and (4) HSA distributions are tax-free if spent on qualified medical expenses. If distributions are not used on qualified medical expenses, they will be subject to a 20 percent penalty if the taxpayer is under the age of 65.

To be eligible for an HSA, you must be covered by a high deductible health plan (HDHP). You must also meet the following requirements: (1) you must have no other health coverage besides the HDHP; (2) you must not be enrolled in Medicare; and (3) you cannot be claimed as a dependent on someone else’s income tax return in the current tax year. For self-only coverage, the 2023 limit on deductible contributions is $3,850. For family coverage, the 2023 limit on deductible contributions is $7,750. A "catch-up" contribution will increase each of these limits by $1,000 if the HSA owner is 55 or older at the end of the year.

Planning Tip—Careful consideration must be given to HSAs when becoming eligible for and enrolling in Medicare. An individual ceases to be an "eligible individual" starting with the month she or he is entitled to benefits under Medicare. However, mere eligibility for Medicare does not disqualify an individual from contributing to an HSA. An otherwise eligible individual who is not actually enrolled in Medicare Part A or Part B may contribute to an HSA until the month that individual becomes enrolled in Medicare.

Most taxpayers know that once they are enrolled in Medicare, they cannot contribute to an HSA; however, many taxpayers who work past age 65 and have an HSA still can be surprised by something known as “retroactive Medicare.” If an individual files a Medicare application more than six months after turning age 65, Medicare Part A coverage will be retroactive for six months. Individuals who delayed applying for Medicare, but were later covered by Medicare retroactively to the month they turned 65 (or retroactively for six months), cannot make contributions to the HSA for the period of retroactive coverage. The retroactive enrollment made the taxpayer ineligible to contribute to an HSA for that period. The result is almost always excess contributions that need to be removed as soon as possible, with your employer needing to be alerted to the retroactive coverage. If you have an HSA that you still contribute to and you are considering applying for Medicare, please consult with your tax adviser first.

Planning Tip—Unlike an FSA account, an HSA is not a “use it or lose it” account. This means wiser choices can be made in long-term healthcare spending. Funds remaining in an HSA at year-end are not forfeited, but remain in the account tax-free until distributed for medical purposes. Like IRAs, an individual owns their HSA, even after a job change, making the HSA a very portable savings device.
Planning Tip—Just as with IRAs (see item 43), HSA contributions can be gifted by another family member. For young adults who have a high-deductible health plan and cannot afford to make additional pre-tax contributions to their HSAs, you may maximize their contribution on their behalf. This strategy allows your young adult child or grandchild to take the deduction on their tax return while also funding an HSA that will hopefully grow and help them with any medical situations during their lives. Please note that this contribution needs to be taken into account when determining your annual gifting limits ($17,000 for 2023).
Planning Tip—Be mindful of the annual contribution limit for HSAs when you switch jobs mid-year. The annual contribution limit ($3,850 for individual coverage and $7,750 for family coverage for year 2023) is a combination of employee contribution and all employer contributions in a calendar year. Multiple employers may be generous enough to contribute to your HSA account, resulting in excess contribution after factoring in your own contribution. Excess contributions are not only not deductible, but also subject to ordinary income tax and an additional 6 percent excise tax. The excise tax applies to each year the excess contributions remain in your HSA account. If you have excess contributions, be sure to withdraw them and any earnings attributable to the excess contributions by the due date of your next tax return.
Planning Tip—Since there is no joint HSA, married couples should consider reviewing their beneficiary information and naming their spouse as beneficiary of their individually held HSAs, as the surviving spouse is not subject to income tax on distributions as long as they are used for medical expenses. Anyone other than the spouse will be taxed on the balance remaining in the HSA upon the account owner’s death.

57. Consider tax payments by credit or debit card. The IRS accepts tax payments by credit and debit cards, both online and over the phone. Some taxpayers may choose to make tax payments with a credit card, which could potentially earn rewards like frequent flyer miles, cash‑back bonuses, reward points or other perks. The IRS now allows a taxpayer to select their preferred payment processor from either payUSAtax, Pay1040 or ACI Payments Inc., whose credit card fees ranged from 1.85 percent to 1.98 percent for tax year 2023. Additionally, they offer flat rates for most debit cards, which range from $2.20 to $2.50. The IRS is also accepting digital wallet payments like PayPal and Venmo. If you are hoping to take advantage of your credit card’s rewards, you must consider the potential fees that come along with your balance due. For example, a $20,000 balance due payment will incur a fee of approximately $400, which is considered a nondeductible personal expense. It might be worth it for some to use their debit card instead, receiving a lower fee of roughly $2.50, but missing out on potential rewards from their credit card.

58. Consider accelerating life insurance benefits. Selling all or even just a portion of your life insurance policy allows the policyholder to receive funds in advance while they are still living. This practice is more prevalent with individuals who are chronically or terminally ill, using the funds to help cover medical bills, the cost of treatment or long-term care services. Additionally, those who are chronically or terminally ill and choose to accelerate their life insurance benefits may exclude these payments from income, subject to certain requirements. When you sell part of your life insurance policy, you are still responsible for making premium payments. An alternative to this is to sell your entire life insurance policy to a viatical settlement provider who regularly engages in the business of purchasing or taking assignments of such policies. Payments received from the viatical settlement provider may also be excluded from income.

59. Manage your nanny tax. If you employ household workers, it might be best to try to keep your total payments to each of your household workers under $2,600. If you pay $2,600 or more to a worker, you are required to withhold Social Security and Medicare taxes from them and pay those withholdings, along with matching employer payroll taxes, on your individual income tax return on Schedule H, Household Employment Taxes. You are not required to withhold Social Security and Medicare taxes from household employees who are your spouse, your child (if they are under age 21), your parent (exceptions apply) and an employee under age 18 (unless the household work is their principal occupation). Additionally, you may have to pay Federal Unemployment Tax, commonly known as FUTA, if you paid more than $1,000 in total to your household workers in any calendar quarter. You also may be required to file quarterly wage reports with your state department of labor to comply with state unemployment insurance requirements, in addition to annual reporting statements such as Form W-2 and Form W-3.

60. Consider deferring loan modifications and debt cancellations until 2024. Deferring the cancellation of your debt until 2024 could lower your taxable income for 2023. Although most debt forgiveness and cancellations are considered taxable income, there are certain exceptions. If your debt cancellation involves insolvency, bankruptcy, student loans or certain other situations, it may qualify for an exclusion from your cancellation of debt (COD) income. However, even when debt cancellation is excluded from income, it may still affect other tax attributes. For instance, the basis usually needs to be reduced for an asset that has its secured debt cancelled, meaning the COD income exclusion is more of a delay in income recognition rather than a complete exclusion. This is because the cancellation will have ongoing effects that need to be monitored for years after the debt has been cancelled. Moreover, determining whether a taxpayer is insolvent can be challenging and costly, as it requires asset and liability appraisals to establish their fair market value on a specific date.

Observation—An exclusion from gross income is also available for the cancellation of qualified principal residence debt. This exclusion, extended until the end of 2025 by the Congressional Appropriations Act of 2021, means that any mortgage debt on a primary residence cancelled after December 31, 2025, will not be eligible for the exclusion unless the provision is extended again. While the Congressional Appropriations Act of 2021 extended the scope of the exclusion, it also reduced the amount of debt that can be excluded from income. The limit was lowered from $1 million to $375,000 for single filers and from $2 million to $750,000 for those filing jointly.

61. Beware of alternative minimum tax. For individuals, AMT remains less threatening than it has been in the past. The AMT predominantly applies to high-income individuals, disallowing certain deductions, while also including certain exempt income in taxable income. In 2023, the exemption amount for single individuals is $81,300 and $126,500 for joint filers. For tax year 2023, the AMT tax rate of 28 percent applies to excess alternative minimum taxable income of $220,700 for all taxpayers ($110,350 for married couples filing separately).

Planning Tip—Many of the adjustments or preferential items that have been part of the alternative minimum taxable income calculation were eliminated with the passing of the TCJA in 2017. Even though the AMT exemption was dramatically increased in 2018, it is still important to plan for the AMT. This change had a significant impact on taxpayers living in states with high income taxes, as the deduction for state and local taxes was not allowed in the AMT computation. The combination of the increased AMT exemption, the $10,000 limitation on the state and local tax deduction and the elimination of miscellaneous itemized deductions resulted in fewer taxpayers being subject to AMT. However, it is important to note that if the state and local tax deduction limitation is increased, which Congress has been considering, more taxpayers may be impacted, though still not as many as in prior years due to the greatly increased exemption.

It may be beneficial to accelerate income, including short-term capital gains, into a year you are subject to AMT, as it could reduce your maximum marginal rate. The opposite could hold true as well—it may be beneficial to defer income as you could be subject to a lower AMT in a following year. You also may want to consider exercising at least a portion of incentive stock options (ISOs) since the favorable regular tax treatment for ISOs has not changed for 2023. However, careful tax planning may be needed for large ISO lots, as exercising them could still subject you to the AMT. If you would not be subject to the AMT in 2023, follow the guiding philosophy of postponing income until 2024 and accelerating deductions (especially charitable contributions) into 2023.

62. Take advantage of extended energy credits. A number of tax credits for purchasing or installing energy efficient improvements for qualified residential properties were extended and modified as part of the Inflation Reduction Act of 2022. The applicable credits that have been adjusted are shown below:




Maximum credit

Energy efficient home improvement credit

Dec. 31, 2032

  • Exterior windows and doors
  • Insulation and systems that reduce heat gain or loss
  • Heat pumps, central air conditioners and water heaters
  • Biomass stoves and boilers
  • Natural gas, propane or oil furnaces or hot water boilers
  • Qualified advanced main air-circulating fans
  • Home energy audits

$1,200 (for 2023 - 2032) for energy property costs and certain energy efficient home improvements

$2,000 per year for qualified heat pumps, biomass stoves and boilers

Residential clean energy credit

Dec. 31, 2034

  • Solar, wind and geothermal power generation
  • Solar water heaters
  • Fuel cells
  • Biomass furnaces and water heaters (no longer applicable after Dec. 31, 2022)
  • Battery storage technology

30% for 2022 - 2032, 26% for 2033, 22% for 2034

Qualified fuel cell motor vehicle

Dec. 31, 2032

Purchases of new qualified fuel cell motor vehicles

$4,000 to $40,000

Alternative fuel vehicle refueling equipment credit

Dec. 31, 2032

Equipment to recharge electric vehicle

$30,000 (for business)

30% of the costs, up to $1,000 (for nondepreciable property)

New energy efficient home credit

Dec. 31, 2032

New (and manufactured) homes meeting Energy Star standards

Certified zero-energy ready homes

$2,500 for new (and manufactured)

$5,000 for zero-energy


63. Retroactively remit withholding via a retirement rollover. Once a year, the IRS allows taxpayers to withdraw money from an IRA tax-free, as long as it is rolled over to another IRA within 60 days. Some perceptive individuals even use this provision to take out a short-term, tax-free loan. The one-year waiting period begins on the date you receive the IRA distribution, not on the date you roll the distribution back into the same or another IRA. These IRA withdrawals are able to have (and in some cases require) federal and/or state taxes withheld. Since withholding can be treated as evenly distributed throughout the year, it is possible to make up for missed estimated payments from earlier in the year.

For example, if you determine in the fourth quarter of 2023 that you missed the previous three quarterly federal estimated payments totaling $60,000, you could take out an IRA distribution for $100,000 with 80 percent or $80,000 withheld. The $80,000 would be remitted to the IRS and, within 60 days of the $100,000 distribution, you would pay back the entire $100,000 amount. The $80,000 of federal withholding would be applied evenly throughout 2023, resulting in $20,000 payments for each of the previous three quarters and therefore void the calculated $60,000 underpayment.

Observation—Careful attention must be given to dates of distribution and when the amounts are repaid. Please consult your tax adviser to determine if a prior quarter underpayment exists, determine how much should be withheld and to set up a timeline for the distribution and repayment. It is also important to consider your assets will be withdrawn from your account until you pay the account back within 60 days. The longer you wait to pay back the IRA, the greater the risk of missing potential market gains.

64. Withdraw retirement funds penalty-free for new parents who need it. Generally, a distribution from a retirement plan must be included in taxable income. Unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59½ is also subject to a 10 percent early withdrawal penalty on the amount includible in income. The SECURE Act created an exception to the 10 percent penalty for new parents. Now plan distributions (up to $5,000) used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Planning Tip—While the penalty for early distributions is waived in this scenario, this distribution will still be considered taxable income. You have up to one year post birth or adoption to make the distribution, so depending on your overall tax planning it might be beneficial for one spouse to take their $5,000 distribution in the first calendar year and the other spouse to take the distribution the following calendar year, but before the one-year period ends. Please consult your tax adviser for the full tax consequences of this penalty-free distribution.

65. Plan for the net investment income tax and Medicare surtax. High-income taxpayers face two special taxes—a 3.8 percent NIIT and a 0.9 percent additional Medicare tax on wage and self-employment income.

Net Investment Income Tax

The 3.8 percent NIIT tax applies, in addition to income tax, to your net investment income. The tax only affects taxpayers whose modified adjusted gross income exceeds $250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. These threshold amounts are not indexed for inflation. Thus, over time, inflation will cause more taxpayers to become subject to the 3.8 percent tax. Net investment income that is subject to the 3.8 percent tax consists of:

  • Interest;
  • Dividends;
  • Annuities;
  • Royalties;
  • Rents; and
  • Net gains from property sales.

Income from an active trade or business is not included in net investment income and neither is wage income. However, passive business income is subject to the NIIT. So, while rents from an active trade or business are not subject to the tax, rents from a passive activity are. See item 39 for more information regarding the classification of passive activities. Income from a business of trading financial instruments or commodities is also included in net investment income.

Planning Tip—NIIT only applies if you have income in excess of the applicable threshold and you have income categorized as net investment income. Consider and discuss the following strategies with your tax adviser to help minimize net investment income: 
  • Investment choices: Since tax-exempt income is not subject to the NIIT, shifting some income investments to tax-exempt bonds could result in reduced exposure to the NIIT. Additionally, a switch to growth stocks over dividend paying stocks may also be beneficial since dividends, even qualified dividends, will be taxed by the NIIT, resulting in a top tax rate for qualified dividends of 23.8 percent.
  • Growing investments in qualified plans: Distributions from qualified retirement plans are exempt from the NIIT; therefore, upper-income taxpayers with control and planning over their situations (i.e., small-business owners), might want to make greater use of qualified plans. For example, creating a traditional defined benefit pension plan will increase tax deductions now and generate future income that may be exempt from the NIIT. For taxpayers with less control over their situation, maximizing pre-tax contributions to retirement plans still reduces adjusted gross income, unlike post-tax contributions. Thus, maximizing contributions to these plans can potentially reduce or eliminate the NIIT in the contribution year.
  • Charitable donations: As discussed in item 24, you may wish to consider donating appreciated securities to charity rather than cash. This will avoid capital gains tax on the built-in gain of the security and avoid the 3.8 percent NIIT on that gain, while generating an income tax charitable deduction equal to the fair market value of the security. You could then use the cash you would have otherwise donated and repurchase the security to achieve a step-up in basis.
  • Passive activities: Income from passive activities is generally subject to the NIIT. Increasing levels of participation in an activity so that the business income becomes nonpassive can avoid the NIIT.
  • Rental income: If you have a real estate professional designation, you also avoid NIIT. If you qualify as a “real estate professional,” as defined under the passive activity rules, and you materially participate in your rental real estate activities, those activities are not considered passive. If the rental income is derived in the ordinary course of a trade or business, it will not be subject to the NIIT.

Medicare Surtax

Some high-wage earners pay an extra 0.9 percent Medicare tax on a portion of their Medicare wages in addition to the 1.45 percent Medicare tax that all wage earners pay. The 0.9 percent Medicare tax applies to wages in excess of $250,000 for joint filers, $125,000 for married individuals filing separately and $200,000 for all others.

The additional 0.9 percent Medicare tax also applies to individuals with self-employment income. This 0.9 percent tax is in addition to the regular 2.9 percent Medicare tax on all self-employment income. The $250,000, $125,000 and $200,000 thresholds are reduced by the taxpayer's wage income. While self-employed individuals can claim half of their self-employment tax as an income tax deduction, the extra 0.9 percent tax is not deductible. A self-employment loss is not considered for purposes of the 0.9 percent Medicare tax.

Planning Tip—While employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income, 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. If you have changed employers or changed your employment status from an employee to a self-employed individual or the reverse (self-employed to employee), watch for the possible additional 0.9 percent Medicare surtax.

66. Consider selling the stock you received from incentive stock options (ISOs), aka statutory options. If you receive ISOs, you are entitled to special treatment for regular tax purposes. This includes: no taxation at the time the ISO is granted or exercised; deferral of tax on the benefit associated with the ISO until the stock is sold; and taxation of the entire profit on the sale of stock acquired through ISO exercise. The ISO is taxed at the lower long-term capital gain rates as long as you hold it for more than two years from date of grant and one year from date of exercise. Employment taxes do not apply on the exercise of an ISO. Be aware that the exercise of an ISO may produce AMT tax, as discussed below.

Planning Tip—If the stock you received has a low basis as compared to the potential selling price, it may be time to sell to offset losses you may have incurred in the market. By offsetting other losses, you may be able to sell this stock with minimal tax consequences.
Observation—This special treatment is not allowed for AMT purposes. Under the AMT rules, you must include income from the year the ISO becomes freely transferable or is not subject to a substantial risk of forfeiture and the bargain purchase price, which is the difference between the ISO’s value and the lower price you paid for it. For most taxpayers, this occurs in the year the ISO is exercised. Consequently, even though you are not taxed for regular tax purposes, you may still have to pay AMT on the bargain purchase price when you exercise the ISO, even though you did not sell the stock and even if the stock price declines significantly after you exercise. Under these circumstances, the tax benefits of your ISO will clearly be diminished. With the passage of the TCJA, the impact of the AMT has been diminished, though careful analysis of the tax environment and AMT exposure through the exercise of ISOs is necessary for maximum tax savings.
Planning Tip—Retirees generally have 90 days after retirement to exercise the options that qualify as ISOs. If you have recently retired or are approaching retirement, evaluate whether the exercise of remaining ISOs will be beneficial.

Also, if 2023 is a down year in terms of income and/or you are worried about future tax increases and wish to lessen the risk for both ordinary income tax rates and capital gains tax rates, consider exercising stock options this year. You will recognize income on many types of options, including nonqualified stock options and incentive options, at the time exercised. Exercising the options before year-end would trigger the income for 2023. Keep in mind, however, that such exercise will also accelerate the deduction for the employer when they may be seeking to defer deductions in anticipation of a rate increase.

Statutory Stock Option (ISO)


Regular tax


Grant date

Not taxable.

Not taxable.

At exercise date

Not taxable.

Increases AMT income by FMV of option less exercise price.

Date of sale (holding period met)

• Income subject to capital gains rates.
• Basis equals exercise price.

Decreases AMT income by the positive AMT adjustment required at exercise date.

Date of sale (holding period not met)

• Gain on sale: FMV of the options less the exercise price is treated as taxable W-2 wages; excess gain is capital gain.
• Loss on sale: The loss is a capital loss.

• Negative AMT adjustment equal to the positive AMT adjustment required at exercise date.
• No adjustment required if stock is exercised and sold in the same year.


Statutory Stock Option (ESPP)


Regular tax


Grant date

Not taxable.

Not taxable.

At exercise date

Not taxable.

Not taxable.

Date of sale (holding period met)

Compensation income if FMV of stock is greater than exercise price.

Same as regular tax.

Date of sale (holding period not met)

• The FMV (at exercise date) of the option minus the exercise price is treated as taxable W-2 wages.
• Basis in the stock is increased by the amount included in compensation. Difference between increased basis and the selling price is a capital gain or loss.

Same as regular tax.


Nonstatutory Stock Option


Regular tax


Grant date

Not taxable unless FMV is readily determined.


At exercise date

• Substantially vested stock: FMV of option minus the exercise price is treated as taxable W-2 wages.
• Restricted stock: Defer recognition until substantially vested.


Date of sale (holding period met or not met)

• The holding period requirement is not applicable to nonstatutory stock options.
• Income is subject to short-term or long-term capital gain or loss treatment.
• Basis equals the amount treated as taxable wages plus exercise price.
• Typically exercise and sale occur on the same day.



67. Take advantage of deferred compensation contributions to maximize the benefits of deferring income. Annual limits for compensation must be taken into account for each employee in determining contributions or benefits under a qualified retirement plan. For 2023, the limit as adjusted for inflation is $330,000. This means that for an executive earning $350,000 a year, deductible contributions to, for instance, a 15 percent profit-sharing plan are limited to 15 percent of $330,000, or $49,500. Nevertheless, there is a way to avoid this limitation that you might want to consider.

It is possible to increase the benefits by using plans that are not subject to qualified plan limitations through nonqualified deferred compensation (NQDC) agreements. These plans have no mandatory contribution limits and it is at the employer’s discretion who participates. These deferred compensation agreements are contracts between an employer and an employee for the payment of compensation in the future—at retirement, on the occurrence of a specific event (such as a corporate takeover) or after a specified number of years―in consideration of the employee’s continued employment with the employer.

Unlike a qualified plan, an NQDC is funded at the discretion of the employer and is subject to the claims of creditors. There are no guarantees that the benefits will be available to the employee in the future. Essentially, the trust is under the employer’s control and, structured properly, will result in a deferral of income taxes for the employee on the amount of compensation deferred above the traditional limitations. Distributions will be taxed at ordinary income rates and are subject to FICA withholding when either performance has occurred or there is no longer a substantial risk for forfeiture and the compensation has vested.

68. Consider filing an IRC Section 83(b) election with regard to year-end restricted stock grants to preserve potential capital gain treatment, but be careful. If you make the election within 30 days of the grant, you will pay tax at ordinary income rates on the spread between the market price (the value of the stock) and the grant price (the amount you paid). The benefit, however, is that you defer taxation on the future appreciation in the value of the restricted stock until it is sold and the post-election increase in value is taxed at the lower capital gain rates, rather than the higher ordinary income rates. The risk with making the election, however, is that the stock price might decline by the vesting date and you will have then prepaid income tax on an unrealized gain. If you eventually sell the stock at a loss, you will be subject to the net capital loss limitation of $3,000. The rules governing restricted stock awards are technically complex and call for careful tax planning strategies.

69. Consider filing an IRC Section 83(i) election with regard to qualified equity grants. Qualified employees at private companies who are granted nonqualified stock options or restricted stock units may elect to defer the income from qualified stock transferred to the employee by the employer for up to five years. This election is an alternative to being taxed in the year in which the property vests under IRC Section 83(a) or in the year in which it is received under Section 83(b). The election to defer income inclusion for qualified stock must be made no later than 30 days after the first date that the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.

Caution: If the fair market value of the stock decreases within the deferral period, the fair market value on the date the stock is received still must be included in the employee's income. This creates the risk of the employee paying income tax on an amount that is never received.

If a qualified employee elects to defer income inclusion, the employee must include the income at the earliest of the following dates:

  • The first date the qualified stock becomes transferable, including transferable back to the employer;
  • The date the employee first becomes an excluded employee;
  • The first date on which any stock of the employer becomes readily tradable on an established securities market;
  • The date five years after the earlier of the first date the employee’s right to the stock is transferable or is not subject to a substantial risk of forfeiture; or
  • The date on which the employee revokes his or her inclusion deferral election.

70. Consider taking a lump-sum distribution of employer stock from a retirement plan. Receiving a lump-sum of employer stock could allow you to achieve large tax savings. Employer stock in a lump-sum distribution from a qualified plan is taxed based on the plan’s basis in the stock rather than on its value, unless a taxpayer elects otherwise. Consequently, assuming value exceeds cost, the tax on the unrealized appreciation is deferred until a later date when the stock is sold. This could be many years after receipt. As an added benefit, when the stock is sold at a later date, the gain is subject to tax at the more favorable long-term capital gains rate. Once distributed, the stock must be held for at least a year in order for any additional appreciation after the date of the lump-sum distribution to be given long-term capital gains treatment. Cash or other nonemployer stock distributed as part of the lump-sum distribution will be taxed at ordinary income tax rates.

71. Implement strategies associated with international tax planning. For executives and high-income earning consultants working abroad, it’s worth exploring strategies to minimize your personal tax liabilities. This can include maximizing the provisions for foreign earned income and housing exclusions, as well as deductions and credits for foreign taxes paid. The taxation process in foreign countries often depends on tax treaties and requires a personalized approach to avoid double taxation. Conducting tax equalization calculations can be helpful in breaking down compensation to maximize the tax benefits associated with international assignments. See the discussion later at items 131-135.

Observation—It’s important to reiterate that U.S. individuals, including resident aliens, are subject to graduated tax rates on their global income, irrespective of whether the income originates from the U.S. or a foreign source. The U.S. taxes foreign-sourced income without considering whether it’s earned income, income from a trade or business, or investment-based income.
Planning Tip—If you find yourself in a life-changing situation where you no longer intend to reside in the U.S. or utilize your United States citizenship and find yourself dealing with adverse tax consequences year after year, it may worth considering to renounce your U.S. citizenship or terminate your resident status. These actions have serious tax (and nontax) consequences as you will have to consider the U.S. mark-to-market exit tax as well as other ramifications.

72. Review your tax planning with a fresh perspective. Corporate executives should consider whether additional tax assistance or supplemental wealth planning may add value. Having a third party take care of your tax planning could reduce potential conflicts of interest associated with having the employer company’s accountants handle the tax related services for the company’s employees. TAG has developed a tax program tailored specifically for corporate executives. Our Executive Tax Assistance Program, designed for corporate executives, provides comprehensive, confidential and highly personalized individual and business tax preparation, planning and consulting services at group-discounted rates. TAG uses a strategic approach to provide comprehensive solutions to your needs.

73. Decrease your tax liability on pass-through income. Business income from pass-through entities is currently taxed at the ordinary individual tax rates of the owners or shareholders. Taxpayers who receive qualified business income from a trade or business through a partnership, limited liability company, S corporation and/or sole proprietorship are allowed a 20 percent deduction, subject to taxable income phaseouts and complex calculations, in arriving at taxable income. The deduction is also afforded to taxpayers who receive qualified real estate investment trust dividends, qualified cooperative dividends and qualified publicly traded partnership income. For owners with taxable incomes over $364,200 (joint filers) or $182,100 (all other filers), the deduction is subject to reduction or elimination based on the owner’s pro rata share of W-2 wages paid by the business and/or the business’ basis in qualified property.

In addition, for taxpayers who own a specified service business and whose taxable income exceeds $464,200 for married individuals filing jointly and $232,100 for all other filers, the deduction is phased out and no longer available.

A “qualified trade or business” is defined as any trade or business other than a specified service trade or business and other than the trade or business of being an employee. “Specified services” are defined as a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services (investing and investment management, trading, dealing in securities, partnership interests or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees). Notably absent from this list, and specifically excluded from the definition of specified services, are engineering and architectural services, as well as real estate agents and bankers.

Planning Tip—There are certain planning strategies taxpayers can use in order to take advantage of these deductions. The service businesses listed above should consider methods to increase tax-deferred income or decrease taxable income at the entity level so that owners close to the $182,100/$364,200 threshold can take full advantage of the pass-through deduction. Some methods of reducing taxable income to fall within these thresholds include:
  • Consider the current status of contractors/employees. If the taxpayer is within the phaseout range and subject to wage limitations, it may be beneficial to deem current contractors as employees, subject to W-2 wages. This increases the W-2 wage base and will provide entity-level deductions for additional payroll taxes and benefits to reduce pass-through income to the shareholder/partner.
  • Take full advantage of retirement vehicles, which serve to reduce taxable income at the shareholder/partner level.
  • Partners and shareholders should plan to maximize above-the-line (such as retirement plan contributions and health insurance, among others) and itemized deductions for purposes of reducing taxable income.
  • Combine qualified businesses and treat them as one aggregated business for the purpose of the Section 199A computation. The combination could result in a higher deduction than treating the businesses separately. Combining businesses can also help taxpayers meet the wage limitations that are part of the deduction computation.
  • Qualified business income, for purposes of computing the 20 percent qualified business income deduction, does not include guaranteed payments to partners in a partnership. Reducing guaranteed payments and allocating profits to ordinary income could increase the deduction for certain partners. In order to do so, a careful review of the partnership agreement is advised and may also require amending the partnership agreement to properly document the change.
  • Investments in real estate investment trusts (REITs) and/or publicly traded partnerships (PTPs) are eligible for a straight 20 percent qualified business income deduction. REITs and PTPs are not subject to the W-2 compensation or basis limitations, or limitations of specified trades or businesses.
  • Perform an analysis to determine if it would be advantageous for married taxpayers to file separately to avoid the threshold limitations.
Observation—The limitations and analysis in computing the qualified business income deduction are complex. An experienced tax adviser, like those in TAG, can assist in properly navigating these rules to ensure preservation of applicable deductions.

74. Take advantage of historically low corporate income tax rates. Since 2018, corporations have been subject to a flat 21 percent tax rate. The 21 percent rate also applies to personal service corporations such as accounting firms and law firms. Over the past two years, legislation in Congress has consistently considered raising corporate tax rates. However, the Inflation Reduction Act of 2022 only created two new corporate tax provisions, expected to affect only a very small percentage of corporations: those with over $1 billion of income or publicly traded companies. See our discussion of these items above at items 9 and 10.

Under current law, the 21 percent corporate rate is not scheduled to expire until tax years beginning after December 31, 2025.

Observation—While the current corporate tax rate of 21 percent may seem more advantageous than the current personal income tax of up to 37 percent paid on pass-through income, the corporate tax structure may not be advantageous for owners of closely held business established as S corporations, limited liability companies or partnerships. While corporations may currently enjoy a lower tax rate on their profits, shareholders will encounter a second tax on dividends distributed to them. The profit of a corporation is taxed first to the corporation when earned and then taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not receive a tax deduction when it distributes dividends to shareholders and shareholders cannot deduct any losses of the corporation. Alternatively, income earned by pass-through entities is taxed only once at the owner level.

Another benefit to the pass-through structure of limited liability companies and partnerships is their flexibility for allocating income/loss and distributing cash/assets. The owners must agree on the allocations, and the allocations must have substantial economic effect. In addition, limited liability companies and partnerships are generally easier to form, manage and operate. They are less regulated in terms of laws governing formation because the owners control the way the business operates.

Businesses, particularly those in service industries that are excluded from the proposed pass-through deduction, should consider if electing C corporation status would be a more favorable structure. Companies that generate significant income, reinvest in their business and do not distribute cash to investors could see a benefit of a lower corporate tax rate. Further, transitioning to a C corporation may be advantageous if you anticipate long-term ownership. However, owners considering a transition to a C corporation should also be mindful of the accumulated earning tax (20 percent tax on companies maintaining too much cash) and the personal holding company tax (25 percent penalty on undistributed passive income earned in a closely held C corporation).

75. Utilize net operating losses (NOL) thoughtfully. Beginning in 2021, the option to carry an NOL back to a prior tax year was eliminated (except for farming losses and certain insurance companies). NOLs can still be carried forward indefinitely and are also subject to an additional annual limitation of the lesser of 80 percent of current year taxable income or the NOL carryforward. For example, a taxpayer with 2023 taxable income of $3 million and an NOL carryforward of $4 million from a prior year would be able to apply $2.4 million of the NOL carryforward (80 percent of 2023 taxable income) to offset its 2023 taxable income and carry forward the remaining NOL balance of $1.6 million indefinitely.

Planning Tip—A taxpayer who may have difficulty taking advantage of the full amount of an NOL carryforward this year should consider shifting income into and deductions away from this year. By doing so, the taxpayer can avoid the intervening year modifications that would apply if the NOL is not fully absorbed in 2023. This may also avoid potentially higher tax rates in future years on the accelerated income and increase the tax value of deferred deductions.

For estimated tax purposes, a corporation (other than a large corporation) anticipating a small NOL for 2023 and substantial profit in 2024 may find it worthwhile to accelerate just enough of its 2024 income (or defer enough of 2023 deductions) to create a small profit in 2023. Doing so would allow the corporation to base its 2024 estimated tax payments on the small amount of 2023 taxable income, rather than pay 2024 estimates on 100 percent of its 2024 taxable income.

If you are in the position to carry an NOL back (farming and certain insurance companies), but expect to report taxable income in future years, it may be worthwhile to forgo the carryback period in order to apply the NOL to future years where tax rates are expected to be higher. Also, it is important to keep in mind that carrying back a loss could have adverse effects on other items of a tax return. Please analyze the scenarios and discuss with a trusted tax adviser before making any decisions.

76. Plan for extended excess business loss limitations. The TCJA effectively limited the amount of business losses that taxpayers were able to use to offset other sources of income for tax years 2018-2025. While the CARES Act reversed the excess business loss (EBL) provisions under TCJA for 2018-2020, the EBL limitations came back into force in 2021―meaning that taxpayers again have to monitor and potentially limit business losses under TCJA. Last year, the Inflation Reduction Act extended the EBL provisions an additional two years, through 2028.

An EBL is defined as the excess of a taxpayer’s aggregate trade or business deductions over the taxpayer’s aggregate gross trade or business income or gain, plus a statutory threshold, indexed for inflation, of $578,000 for joint filers ($289,000 for other filers) for 2023. Net trade or business losses in excess of $578,000 for joint filers ($289,000 for other filers) are carried forward as part of the taxpayer’s net operating loss to subsequent tax years. For 2024, the threshold will increase to $610,000 for joint filers ($305,000 for other filers).

The CARES Act also clarified several gray areas associated with EBL limitations created by TCJA, including:

  • The exclusion of taxpayer wages from trade or business income;
  • The exclusion of net operating loss carryforwards from determining a taxpayer’s EBL; and
  • Specifying that only trade or business capital gains are included in EBL computations, while excluding net capital losses. The taxpayer is to include in EBL limitations the lesser of either capital gain net income from business sources or capital gain net income.

77. Be sure to receive the maximum benefit for business interest. For 2023, the business interest expense deduction is limited to 30 percent of the adjusted taxable income of the business, applicable at the entity level for partnerships and S corporations. However, certain smaller businesses (with less than an inflation-indexed $29 million in average annual gross receipts for the three-year tax period ending with the prior tax period) are exempt from this limitation for 2023. For 2024, this inflation indexed amount is expected to be $30 million.

The deduction limit for net business interest expenses for 2023 is limited to 30 percent of an affected business’ adjusted taxable income. Additionally, the formula to determine adjusted taxable income has yet again changed. For 2022 and forward, depreciation and amortization are no longer allowed to be added back to taxable income when determining the business interest limitation. Interest and taxes are still allowed to be added back.

Observation—While a bill was introduced in the House during 2023 to enable some of these deductions to be added back for determining the business interest limitation, the bill as of this writing seems stalled in Congress despite bipartisan support.
Planning Tip—Real estate entities, which tend to have larger depreciation and amortization deductions, may want to consider making an irrevocable election out of the business interest regime under IRC 163(j). Doing so would provide no limitation on deducting interest expense; however, the tradeoff is that the entity is required to compute depreciation using the alternative depreciation system, which generally results in longer cost recovery periods and lower annual depreciation deductions.

78. Evaluate your sales tax exposure. In light of the Supreme Court’s South Dakota v. Wayfair, Inc. decision, businesses should periodically review their operations to determine if they have additional sales and use tax exposure. Businesses that have large retail or e-commerce sales may be subject to sales or use taxes, even if they do not have a physical presence in the state or local jurisdiction.

Recently, however, a Pennsylvania court ruled in favor of a taxpayer, stating that an out-of-state business selling products through Amazon’s Pennsylvania warehouse was not subject to sales and income tax in the state.

In a more aggressive interpretation, the Multistate Tax Commission (MTC), which is a conglomeration of state tax agencies seeking to define a uniform set of rules for determining sales and income tax nexus, issued guidance indicating that the following activities are sufficient to create nexus for an out-of-state business:

  • Providing post-sale customer support via website chat or email link;
  • The acceptance of job applications for nonsales positions on a website;
  • Placing cookies on the computers of customers who browse a website for the purpose of adjusting production or identifying/developing new products to sell.

So far, California and New York have announced the adoption of the MTC’s provisions, with many more states expected to follow suit.

Accordingly, now is the time to perform an assessment of your business activities and make plans to become compliant (if warranted) in early 2024.

79. Evaluate your state tax exposure in light of increased telecommuting. In a post-COVID, remote work environment, virtually every state has taken the position that having an employee present within a state creates nexus and will potentially subject the employer to business registrations, employee withholding, registered agent requirements and/or business tax filings.

As such, each state where you have an employee working remotely must be closely examined, as every state has different methods for apportioning taxable income, sourcing revenue, minimum factor presence standards and other registration requirements. We have conducted many such assessments and would be pleased to assist our clients with future needs.

80. Be careful where you operate―avoid an unintentional income tax nexus. The concept of corporations paying their fair share of taxes ebbs and flows in worldwide media, but it has received renewed attention in the cash-strapped economies of the post-COVID-19 pandemic era.

Many states and even local tax jurisdictions have looked to broaden their tax collection base through the assertion of nexus in a variety of different ways. For tax purposes, nexus is a minimum connection between a taxpayer and a tax jurisdiction that must take place before a taxing jurisdiction can impose a tax obligation on a taxpayer.

Although it has been widely established through case law that physical presence in a taxing jurisdiction is not required in order to create income tax nexus, the concept of economic nexus is becoming more and more prevalent. Economic nexus looks to the quantity of transactions and/or the dollar amount of transactions a taxpayer realizes in a given tax year within a taxing jurisdiction. Through recent court cases, states have become more empowered to expand upon the concept of economic nexus and apply more broadly across essentially any type of activity in which the taxpayer is engaged.

Additionally, there has been a consistent shift of states updating legislation in order to source revenue through the “market-based” approach. Market-based sourcing requires the taxpayer to allocate revenue based on where the ultimate receipt of their services is derived. If a taxpayer has its operations and employees solely in State X, but sells services to customers in States A, B and C, the taxpayer would be required to allocate a portion of their revenue to States A, B and C, and file income tax returns accordingly. Certain states have minimum revenue thresholds (economic nexus thresholds) that have to be met in order to create a reporting requirement, while other states require reporting if there is even $1 of revenue sourced under a market-based approach. As of the current tax year, roughly 80 percent of states require a market-based approach when sourcing revenue.

Now is the opportune time for taxpayers to assess the nature of their activities, locations (including remote work) of employees and locations of customers, as virtually any type of business, no matter how trivial, may trigger nexus. Mostly all states offer some form of voluntary disclosure program where a taxpayer can voluntarily come forward, file several years of back tax returns and pay any tax due, and in return the state will waive penalties, and in some instances even a portion of the interest on back taxes, depending on the details of each state’s respective program.

81. Elect into state pass-through taxes to save owners federal tax. Currently, 36 states have enacted pass-through entity (PTE) tax filing elections. Nine states have no personal income tax, which means only a select few have not enacted a PTE tax (Maine, Pennsylvania, Vermont, District of Colombia, Delaware and North Dakota).

As a quick refresher, the TCJA put a cap of $10,000 on the state and local income tax deduction for taxpayers itemizing their deductions on Schedule A. In response, several high-tax states enacted legislation allowing pass-through entities (partnerships, LLCs and S corporations) to elect to pay the state income tax at the entity level and pass out a state income tax credit to the partners/shareholders. The PTE tax election allowed the state income tax liability to be deducted at the entity level, for federal purposes, effectively bypassing the $10,000 limitation imposed by the TCJA.

In the beginning stages, PTE tax elections were more stringent; however, many states have relaxed the requirements governing which entities are allowed to participate, as well as how income is apportioned for purposes of determining the PTE tax liability.

A pass-through entity operating in several different states with owners residing in several different states must carefully examine the PTE regulations in each state where tax filings are required. Each state has different rules for the timing of making the election, when estimated tax payments are required, whether or not certain partners/shareholders can opt out of the PTE election, income apportionment and PTE tax rates.

PTE elections can be particularly beneficial in years a pass-through entity experiences unusually high taxable income or anticipate entering into an agreement to sell all or a portion of the business. PTE elections will continue to offer substantial tax savings for those who can participate through at least 2025. Once the $10,000 limitation imposed by the TCJA expires, PTE advantages may become obsolete or evolve even further, depending on how Congress acts.

82. Review your plans to entertain clients. The Consolidated Appropriations Act of 2021 provided a temporary 100 percent deduction for business meals provided by a restaurant for the 2021 and 2022 tax years. This expanded deduction lapsed on January 1, 2023, at which time the limitation reverted back to 50 percent for most meals.

Since 2018, businesses have been unable to write off expenses associated with entertaining clients for business purposes. However, business meals paid concurrently with entertainment expenses are still 50 percent deductible, provided these expenses are separately paid for or separately stated on the invoice.

Observation—Even though the tax deduction for most meals has reverted back to the 50 percent limitation, there are still instances where a 100 percent deduction is available to taxpayers. Types of meals eligible for a full deduction include: meals with employees/contractors if a majority (generally greater than 50 percent) of staff are present, food and beverages for company holiday parties/retreats, and food and beverages given free to the public.
Planning Tip—Entertainment activities with clients should be reviewed before year-end to determine their deductibility for 2023. The deduction for meals is preserved, so to the extent possible be sure to break out on the invoice the food portion of any entertainment expense incurred and, as always, maintain contemporaneous logs or other evidence of the business purpose of all meals and entertainment expenditures. This may require enhanced general ledger reporting to minimize effort in segregating deductible and nondeductible meals and entertainment expenses.

83. If you are looking to utilize bonus depreciation, plan your purchase of business property by year-end. For 2023, businesses can expense, under IRC Section 179, up to $1.16 million of qualified business property purchased during the year. This $1.16 million deduction is phased out, dollar for dollar, by the amount that the qualified property purchased exceeds $2.89 million.

Generally, qualified business property for purposes of Section 179 includes tangible personal property used in a trade or business, as well as nonresidential qualified improvement property, including, but not limited to, roofs, HVAC systems, fire protection and alarm systems and security systems. The qualified improvement property must also be placed in service after the date of the real property in order to qualify for accelerated depreciation under Section 179.

Additionally, bonus depreciation can be claimed on 80 percent of qualified new or used property placed in service during the year, and the first year bonus depreciation on passenger automobiles (vehicles with gross vehicle weight less than or equal to 6,000 pounds) is currently $8,000. Bonus depreciation of 80 percent under the TCJA is available for property placed in service during the 2023 tax year. The definition of “qualified property” for purposes of bonus depreciation has been expanded to include the purchase of used property, so long as the taxpayer has not previously used the property (such as in a sale-leaseback transaction).

Beginning January 1, 2024, bonus depreciation drops to 60 percent of qualified new or used property, and under current legislation will continue to be phased down by 20 percent each year until completely phased out in 2027.

Qualified business property for purposes of bonus depreciation includes, but is not limited to, equipment and tangible personal property used in business, business vehicles, computers, office furniture and land improvements to a business, as long as the recovery period of the property is less than or equal to 20 years.

Observation—For a vehicle to be eligible for these tax breaks, it must be used more than 50 percent for business purposes, and the taxpayer cannot elect out of the deductions for the class of property that includes passenger automobiles (five-year property).
Planning Tip—Depending on state regulations governing bonus depreciation and Section 179, if you have taxable income, consider using Section 179 in lieu of bonus depreciation. Section 179 allows for a full deduction instead of 80 percent, and most states either follow federal treatment or offer a reduced Section 179 deduction, whereas bonus depreciation in a taxpayer’s home state may not be allowed at all.

If electing Section 179 and subject to taxable income limitations, consider picking assets with longer depreciable lives to expense under Section 179. By doing this, you will depreciate your other assets over shorter recovery periods, thus accelerating and maximizing your depreciation deduction. Also, remember any unused Section 179 deductions due to taxable income limitations get carried to the subsequent tax year.

84. Select the appropriate business automobile. For business passenger cars first placed in service in 2023, the ceiling for depreciation deductions is $12,200. Higher deductible amounts apply for certain trucks and vans (passenger autos built on a truck chassis, including SUVs and vans). Vehicles such as SUVs and vans with gross vehicle weight ratings of between 6,000 pounds and 14,000 pounds are restricted to a first-year deduction of $12,200, in addition to the $28,900 that is permitted to be expensed under IRC Section 179. Automobiles that are used 50 percent or more for business are also eligible for bonus depreciation of up to $8,000. For vehicles placed in service in 2023, the depreciation limitation for passenger automobiles is $12,200 for the year the automobile is placed in service, $19,500 for the second year, $11,700 for the third year and $6,960 for the fourth and later years in the recovery period.

New Vehicle Depreciation in 2023




Passenger automobiles

SUVs, vans, trucks

Maximum Section 179 allowed



Maximum bonus depreciation allowed



Year 1*



Year 2*



Year 3*



Year 4* and later



*Maximum amount of depreciation if electing out of or not qualifying for bonus depreciation and/or Section 179.

Illustration—If you purchase an SUV that costs $100,000 before the end of 2023, assuming it would qualify for the expensing election, you would be allowed a $28,900 deduction on this year’s tax return. In addition, the remaining adjusted basis of $71,100 ($100,000 cost, less $28,900 expensed under Section 179) would be eligible for an 80 percent bonus depreciation deduction of $56,880 under the general depreciation rules, plus up to the $12,200 cap for regular depreciation, resulting in a total first-year write-off of $88,624. This illustration also assumes 100 percent business use of the SUV.
Observation—Beware: Although the accelerated depreciation for passenger automobiles and SUVs is appealing, if your business use of the vehicle drops below 50 percent in a later year, the accelerated depreciation must be recaptured as ordinary income in the year business use drops below 50 percent.

Additionally, taxpayers are strongly urged to keep track of business miles through manual logs or digital apps in order to support business use of listed property.

85. Capitalize research and development expenses rather than deduct them. The TCJA made significant changes to research and development (R&D) expenses, which traditionally have been eligible for a write-off in the year incurred. Beginning in 2022, instead of deducting R&D costs when incurred, businesses must now capitalize and amortize over a five-year period for U.S.-based research and a 15-year period for research conducted abroad. These rules also apply to software development costs; however, real estate development and mining industries are exempt and are covered under different code provisions. It is also important to note that, even if the R&D project is abandoned or disposed of, no immediate deduction is available.

Observation—This change in accounting for R&D expenses does not impact the computation of the R&D tax credit, discussed above. The requirement to amortize R&D expenses only affects taxable income; the credit is still calculated based on the expenses incurred during the tax year.
Planning Tip—Many taxpayers likely performed R&D studies several years ago to establish a methodology of which general ledger expense items to include as R&D expenses. In light of the current changes, it makes sense for taxpayers to revisit their R&D study and determine if the original expenses identified still qualify. If company operations have changed over the years, taxpayers may be over or under-classifying R&D expenses.

It is also important taxpayers understand any differences in tax reporting at state/local levels for R&D expenses. Some states conform to new federal treatment, while others have decoupled and follow the old rules allowing for an immediate deduction. Pennsylvania, for example, confirms to federal treatment for C corporations only, while pass-through entities are permitted a full deduction for R&D expenses in the year incurred.

86. Defer taxes by accelerating depreciation deductions with cost segregation. Cost segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce the federal and state income taxes they pay on their rental income. Property placed in service after September 27, 2017, with a class life of up to 20 years will generally qualify for bonus depreciation. The bonus depreciation rate decreases from 100 to 80 percent for 2023. The rate will continue to phase out in 20 percent increments through 2026. Therefore, to maximize deductions and bonus depreciation, assets should be placed in service by year-end if possible. Real estate that is nonresidential property is generally classified as 39-year property and is not eligible for bonus depreciation. A cost segregation study allows for the appropriate allocation of costs amongst various class lives and may permit owners to take advantage of greater depreciation deductions (including bonus depreciation). Further, by frontloading allowable depreciation deductions to the early years of the property’s life, reclassification can result in significantly shorter tax lives and greater tax deferrals.

87. Consider simplifying accounting methods. If average gross receipts for the three prior years exceed $29 million in 2023, taxpayers are not permitted to use the simpler cash method of accounting, which could create an additional accounting expense. Similarly, businesses with average gross receipts of over $29 million are not able to account for inventories of materials and supplies, and taxpayers are forced to use the more complex uniform capitalization rules. Under the TCJA, the thresholds for both the cash method of accounting and the uniform capitalization rules were indexed for inflation and have increased from $27 million in 2022. Keep in mind that if your business is considered a tax shelter that you are required to use the accrual method of accounting.

Planning Tip—If your business’ income previously exceeded the thresholds, but falls beneath the higher thresholds for 2023, it may be worth considering whether tax accounting change would be a useful strategy. The average gross receipts threshold is estimated to increase to $30 million in 2024.

88. Determine the merits of switching from the accrual method to the cash method of accounting. The cash method allows for businesses to deduct expenses when paid, whereas the accrual method deducts expenses when either economic performance has occurred or all events have been met. The accrual method of accounting is generally used by businesses that sell merchandise to account for revenue and inventory related to the merchandise. While this may provide a more complete picture of the financial status of a business, from a tax perspective it provides much less flexibility in terms of planning options and is more difficult to use than the cash method of accounting. The good news is that for 2023, businesses with average gross receipts over the last three years of $29 million or less that would otherwise be required to use the accrual method of accounting can elect to use the cash method. A C corporation that is a qualified personal service corporation is also allowed to use the cash method, as long as it does not maintain inventories for tax purposes, regardless of annual gross receipts. While there are some caveats to obtaining this relief, it is a tax-saving strategy worth considering if your business can meet the average gross receipts test and is currently using the accrual method of accounting.

89. Select the most tax-efficient inventory method. If your business tracks inventory, you may be able to realize meaningful income tax savings based on your selected inventory method. For example, in a period of rising prices, like we are currently in, using the last in, first out (LIFO) method can produce income tax savings since it assumes that the higher priced inventory units purchased last were the first ones sold. Conversely, in a period of falling prices, the first in, first out (FIFO) method will provide larger tax savings since it assumes that higher priced inventory units purchased first are the first ones sold. The IRS requires you to select an inventory method the first year your business is in operation. If you decide to make a change, you must alert the IRS and gain approval for the first tax year that you adopt the new method. Professional assistance may be needed.

90. Establish a tax-efficient business structure. The structure of your business can impact your personal liabilities as well as your tax liabilities. Businesses may operate under various structures, including general partnership, limited liability company, limited liability partnership, S corporation, C corporation and sole proprietorship. In particular, the C corporation has a structure that can cause double taxation, especially upon the sale of a business. While the primary factors that distinguish one structure from another are often owner liability and income taxation, it is prudent to consider other characteristics as well. Some of the more pertinent considerations are summarized in the chart below. The entity selection decision should be carefully evaluated by you and your team of legal and tax advisers as it is one of the first and most important decisions made when setting up a business.

Considerations When Choosing Business Entity


C corporation

S corporation

Sole proprietor


Limited liability company

Limit on number of owners

No limit



Two or more

No limit

Type of owners

No limitation


Certain individuals, estates, charities and S corporations


No limitation

No limitation

Tax year

Any year permitted

Calendar year

Calendar year

Calendar year

Calendar year

How is income taxed

Corporate level

Owner level

Individual level

Owner level

Owner level, unless treated as an C corporation

Character of income

No flow through to shareholders

Flow through to shareholders

Taxed at individual level

Flow through to partners

Flow through to members

Net operating losses

No flow through to shareholders

Flow through to shareholders

Taxed at individual level

Flow through to partners

Flow through to members

Payroll taxes

Shareholder/officers subject to payroll taxes only on compensation

Shareholder/officers subject to payroll taxes only on compensation

Active owner subject to self-employment taxes on all income; no unemployment tax

Active general partner subject to self-employment taxes on all income; no unemployment tax

Active member subject to self employment taxes on all income; no unemployment tax

Distributions of cash

Dividends to extent of earnings and profits

Typically not taxable until accumulated adjustment account is fully recovered

No effect

No effect except for calculation of basis

No effect except for calculation of basis

Distribution of property

Dividend treatment, gain recognition to entity

Gain recognition to entity

No effect

No gain or loss to entity

No gain or loss to entity


Planning Tip—Self-employment taxes are rarely discussed during the formation of an entity, but should the entity choose a multimember LLC, careful structuring may help minimize the members’ exposure. Generally, the income of multimember LLCs is taxed as a partnership and income flows through to the partners, who may be subject to self-employment tax. However, the income of limited partners is not usually subject to self-employment tax unless the payments are guaranteed payments for services rendered. The IRS further restricts who may claim the limited partner exception to self-employment tax based on the partner’s involvement and activity within the entity. In order to avoid such treatment, a number of steps can be taken at entity formation to protect against inadvertent self-employment tax. The LLC may wish to form a management company, make a spouse the majority partner in the LLC or establish multiple ownership classes. If you are forming an entity, you need to ensure you have a knowledgeable tax adviser in your corner in order to maximize planning opportunities.

91. Ensure your S corporation is paying reasonable compensation. The tax law requires an S corporation pay their shareholder/employees a reasonable compensation for their services to the S corporation. The compensation paid is treated as wages subject to employment taxes. If the S corporation does not pay a reasonable compensation for shareholder/employee services, the IRS may treat a portion of the S corporation's distributions to the shareholder as wages and impose Social Security and Medicare taxes on the adjusted wages.

With the passage of the Inflation Reduction Act and the infusion of cash into enforcement procedures, reasonable compensation examinations are projected to increase in the coming years. This makes it a great time to check or double check that your S Corporation is paying reasonable compensation.

Observation—Reasonable compensation is not a defined standard and there is no simple formula. Instead, reasonable compensation is based on a variety of facts and circumstances, which can include, but is not limited to:
  • Responsibilities and duties of the shareholder/employee;
  • The amount of time required to perform those duties;
  • The employee's ability and accomplishments;
  • What local business pay for providing similar services in your area; and
  • Compensation agreements.

Given the varying aspects of how reasonable compensation can be computed, how should you approach the computation of reasonable compensation? While there is no one answer, the most important aspect of reasonable compensation is maintaining contemporaneous and credible documentation to support the research used to determine the end reasonable compensation number showing all factors used to making a reasonable decision.

92. Consider the benefits of establishing a home office. With more people now working from home than ever before, taxpayers may wonder if they qualify for the home office deduction. Those taxpayers who own small businesses or are self-employed and work out of their home may very well have the ability to take advantage of the home office deduction if they heed the rules below. Currently, W-2 employees do not qualify to take the home office deduction.

Expenses related to your home office are deductible as long as the portion of your home that qualifies as a home office is used exclusively and on a regular basis as a principal place of business. This can be broken down into a few factors:

  1. You must use part of the home or apartment on a continuous, ongoing or recurring basis. Generally, this means a few hours a week, every week. A few days a month, every month, may do the trick. But occasional, “once in a while” business use won't do.
  2. To qualify under the exclusive use test, you must use a specific area of your home or apartment only for your trade or business. The area used for business can be a room or, preferably, a separately identifiable space. It cannot be the kitchen table, family room, den or playroom where clearly other nonbusiness activities occur.
  3. The area must be a place where you meet or deal with clients in the normal course of your trade or business, and the use of your home is substantial and integral to the conduct of your business. Incidental or occasional business use is not regular use, but this test may be met even if you also carry on business at another location.

A simplified home office deduction ($5 per square foot, up to 1,500 square feet) is also available to taxpayers, which minimizes expense tracking while providing a flat rate deduction per square foot of office space. In addition to claiming a deduction for home office expenses, the ability to qualify as a home office may enable you to deduct the cost of traveling between your home and other locations where you conduct business.

Observation—Take advantage of the home office deduction if you meet the requirements. Using your home or apartment for occasional meetings and telephone/videoconferencing calls will likely not qualify you to deduct expenses for business use, even if you are working there full time during the course of the pandemic. The exclusive use test discussed above may be satisfied by remote workers, as long as you are using the space exclusively for business (i.e., you are not working from the kitchen table). However, the regular test as a continuous, ongoing or recurring basis may not be met if you have been required to return to the office. It is still unclear whether regular use for a short period of time, but not thereafter, will pass IRS scrutiny, so it is often best to tread lightly when claiming a home office, as home office expenses may not be worth the often nominal tax impact and potential audit exposure.

Also, there is a potential downside for claiming home office deductions. For example, on the sale of your home, home office depreciation previously claimed does not qualify for the exclusion of gain on the sale of a principal residence, which could result in additional tax when you sell your home. Additionally, be sure you meet all the requirements for claiming a home office deduction, as the deduction can be a red flag, prompting IRS inquiry. It will be important to be proactive in your tax planning and maintain accurate record keeping.

93. Take a closer look at your independent contractors and employees to ensure correct classification. While hiring workers for your business seems simple enough, the question of whether a worker is an independent contractor or employee for federal income and employment tax purposes is a complex one. It is intensely factual, and the consequences of misclassifying a worker can be serious. In general, the person (or entity) who controls how a job is performed is the employer. There are many factors requiring assessment to properly determine degree of control, as discussed below. Therefore, if the worker has control, the worker is self-employed and an independent contractor subject to self-employment taxes. On the other hand, if a worker is an employee, the company must withhold federal income and payroll taxes, pay the employer’s share of Federal Insurance Contributions Act taxes on the wages plus Federal Unemployment Tax Act tax, and often provide the worker with fringe benefits that are made available to other employees. There may be state tax obligations as well. Since these employer obligations do not apply for a worker who is an independent contractor, the savings can be substantial.

Observation—The IRS continues to intensely scrutinize employee/independent contractor status. If the IRS examines this situation and reclassifies the worker as an employee, not only are employment taxes due, but steep penalties will be assessed. The IRS’ three-category approach―behavioral control, financial control and type of relationship―essentially distills the 20-factor test the IRS had used to determine whether a worker was an employee or an independent contractor. The gig economy is also changing the landscape by challenging the use of traditional criteria to assess a worker’s classification. Consider seeking professional guidance to review your worker classifications.

94. Maximize business deductions and minimize employee taxable income by establishing an accountable expense reimbursement plan. An accountable plan reimburses employees for work-related expenses by utilizing specific reporting, substantiation of business expenses and return of any excess cash advances. Employers are allowed to deduct, and employees allowed to exclude from gross income, employer expense reimbursements if paid under an accountable plan. Since both the employer and employee benefit from establishing an accountable plan, the need to specifically track expenses is usually worth the minimal extra effort over a nonaccountable plan.

Observation—An accountable plan is a process of reimbursing an employee, through proper and formal expense reimbursement and reporting procedures, for business-related expenses, and therefore not included in compensation and ultimately not considered taxable income. The costs must be business-related; therefore, it is imperative to maintain segregated and accurate accounting of expenses. Examples of reimbursable expenses can be the business use of a cellphone or professional dues associated with one’s career. The key is to develop a reimbursement process that is consistent and well documented within the organization.

95. Employ your child or grandchild to increase tax savings. By employing your children or grandchildren, you are able to shift income from you to them―which typically subjects the income to the child’s lower tax bracket and may actually avoid tax entirely (due to the child’s standard deduction). Since this is not investment income, the earned income is not subject to the kiddie tax. There are also payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both Social Security and Medicare taxes, while payments for the services of a child under the age of 21 are not subject to Federal Unemployment Tax. Payments to children by a corporation or partnership are not exempt from these payroll taxes, however. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. (See item 43.)

Observation—When employing your child or grandchild, keep in mind that any wages paid must be reasonable given the child’s age and work skills. Also, if the child is in college or entering soon, excessive earned income may have a detrimental impact on the student’s eligibility for financial aid.

96. Don’t overlook your business tax credits. Credits are dollar-for-dollar reductions in tax and are much more valuable than deductions. Employers can claim the work opportunity tax credit, which is equal to a percentage of wages paid to employees of certain targeted groups during the tax year. Other credits, such as the retirement plan tax credit, may also be available, but certain actions must take place before year-end to qualify. Employers can also receive tax credits for other employee-provided services such as child care facilities/services, making improvements so businesses are accessible to persons with disabilities, and providing health insurance coverage to employees. Credits are also available for paid family and medical leave if an employer has written policies in place.

97. Conduct a research and development study to maximize your R&D tax credit. The R&D credit may be claimed by taxpaying businesses that develop, design or improve products, processes, formulas or software. Many states also have an R&D credit. More industries and activities now qualify for the R&D tax credit than ever before. The credit is even available for professional firms that develop or improve software for use in their business. Businesses of all sizes should consider a formal R&D study, especially in light of the five-year amortization requirement, to ensure property tax compliance as well as maximization of R&D credit potential.

98. Generate payroll tax credits with the R&D tax credit. While it is generally known that the R&D tax credit can be applied to income taxes and the AMT (as long as certain requirements are met), qualified small businesses can also use the R&D tax credit against their Social Security payroll taxes. To qualify for this credit, a small business must: (a) have gross receipts of under $5 million for the current tax year; (b) have had gross receipts for five years or less, including the current year; (c) have qualifying research activities and expenditures; (d) have R&D credits it can use in that year; and (e) incur payroll tax liabilities. Businesses can generate up to $250,000 in payroll tax credits per year for five years, and any unused portion can be carried forward to future years. The payroll tax offset is available on a quarterly basis beginning in the first calendar quarter that begins after a taxpayer files their federal income tax return. The payroll tax credit election may especially benefit eligible startup businesses having little or no income tax liability. Contact us or your qualified tax professional for assistance in determining activities eligible for these incentives and the assessment of the appropriate documentation required to support your claim.

99. Perform a compensation study. Businesses can maintain deductibility, yet avoid payroll taxes, on compensation moved from salary to fringe benefits. Employees will enjoy the tax savings resulting from lower taxable compensation. Benefits typically shifted include medical insurance and employee discounts. This may be a positive way to attract and retain employees. It is important to note, however, that transportation fringe benefits are not deductible by the employer unless included in the employee’s W-2 wages.

Planning Tip—In this competitive employee market, employers are finding it necessary to increase both wages and benefits. One terrific tool is the $5,250 employer-provided tuition assistance reimbursement. Your employees will benefit from untaxed compensation, while the employer utilizes a compensation tool not subject to employment taxes. (See item 111.)

Utilizing a qualified plan for employee expense reimbursements is another way both employer and employee may enjoy tax-advantaged benefits, while also potentially helping the employer save on office expenses. We are often called upon to help ensure that our clients’ plans meet IRS requirements.

Transportation benefits are another way to provide tax advantaged benefits. The costs for parking, transit passes and vanpooling are tax-free up to a set monthly limit ($300 in 2023).

100. Enhance employee health by establishing health savings accounts (HSAs) and other cafeteria plans (i.e., Section 125 plans or flexible spending accounts). A Section 125 plan, also known as a cafeteria plan, is a written plan maintained by an employer allowing eligible employees to access certain benefits. These plans provide an IRS-approved way to lower taxes for both employers and employees, since they enable employees to make pre-tax contributions from their paychecks for adoption expenses, certain employer-sponsored insurance premium contributions, dependent care costs and unreimbursed medical expenses. Furthermore, Section 125 plans are permitted to offer salary-reduction HSA contributions for eligible employees as part of the menu of plan choices. Thus, employers can sponsor the HSAs and employer contributions are not subject to income or employment taxes.

Funds contributed by employees are free of federal income tax (at a maximum rate of 37 percent), Social Security and Medicare taxes (at 7.65 percent) and most state income taxes, with the notable exceptions of California and New Jersey (at maximum rates as high as 11 percent), resulting in a tax savings of as much as 55.65 percent. As a result, the employer also pays less in Social Security matching tax. Like an accountable expense reimbursement plan, it can assist an organization in achieving its strategic goals by enhancing its ability to attract and retain talented, experienced people. Since many restrictions apply, you should carefully review this arrangement before instituting a plan.

Planning Tip—Unlike retirement accounts, employer contributions to an HSA are 100 percent vested, meaning that employees own the funds in their account from the moment they are deposited. Therefore, employers cannot recoup payments from employees who terminate employment.
Planning Tip—To be in compliance with Section 125 plans, proper documents, including a master plan document, an adoption agreement and a summary plan description, must be maintained. Furthermore, the plan documents must be furnished to all eligible employees within 90 days of becoming covered by the plan.

101. Draft a succession plan. Every business owner should have a strategy in place for the transfer of the business to new ownership in the event of the owner’s death, disability or retirement. Failure to properly plan for an ownership transition cannot only turn a successful business into a failed business, it can also create a greater tax burden on the owner or their heirs. You will need to identify candidates for leadership as well as ownership roles, while also considering estate and gift tax consequences. Together with your lawyer, CPA and financial advisers, you can transfer control as desired, develop a buy-sell agreement, create an employee stock ownership plan and carry out the succession of your business in an orderly fashion.

102. Deduct your business bad debts. It is prudent to examine your receivables before year-end if your business uses the accrual method of accounting, as business bad debts are treated as ordinary losses and can be deducted when either partially or wholly worthless. Do not pour salt into the wound by paying income tax on income you will never realize; not being paid for services or merchandise that you have sold is bad enough.

103. Do not become trapped by the hobby loss rules. If your business will realize a loss this year, you need to consider the so‑called hobby loss rules to ensure that the business is treated like a business, not a hobby, and that the loss will be deductible. If an activity results in a profit in three out of the last five years, it is generally presumed to be a for-profit venture and not a hobby. Even if the activity is not for profit, the income must be included on your tax return, though in this case, the income may not be subject to self-employment taxes.

104. Sell your company’s stock, rather than its assets. If you are considering selling your business, you may wish to structure the transaction as a sale of the company’s stock rather than a sale of the company’s assets. A sale of your company’s stock will be treated as the sale of a capital asset and the preferential long-term capital gain rates will apply. A sale of the company’s assets, on the other hand, will typically result in at least some of the gain being taxed at the much higher ordinary income tax rates. However, since the buyer will generally want to structure the transaction as a purchase of the company’s assets in order to increase his or her depreciation deductions, some negotiating by both parties should be expected. The sale of a business is a complex transaction and you should consult your legal and tax professionals when considering a sale.

While the potential taxes from selling your business can be daunting, deferring the gain or spreading income over a few years through an installment sale could prove useful and benefit both parties involved.

105. Consider installment sale treatment for sales of property at a gain. When property is sold, gain is generally recognized in the year of sale. The installment sale provisions can delay the tax impact of the sale until the funds are collected. The installment method is required for cases where there is a sale of property and the seller receives at least one payment after the year in which the sale occurs. This method typically defers a substantial part of the tax on the sale to later years. Under the installment method, gain is recognized ratably over multiple years on the sale to the extent that payments are made on the installment note, subject to a gross profit computation. This allows the gain to be recognized only to the extent of payments actually received and is a valuable method to defer income. If cash proceeds are received over multiple years and you prefer not to use the installment sales method to report the income, an election is available to “elect out” of the installment sale treatment and pay the entire amount of tax due in the year of sale. You have until the due date of your return (including extensions) to elect out of installment reporting. In addition, not all states allow this type of gain treatment, so state tax effects also need to be considered.

Observation—The IRS also imposes an additional interest charge on installment sale obligations if the total amount of the taxpayer’s installment obligations at the end of the tax year exceed $5 million. The interest charge is assessed in exchange for the taxpayer’s right to pay the tax on the installment sale income over a period of time.
Planning Tip—Many types of transactions are not eligible to be reported under the installment sale method. These transactions include a sale at a loss, sales of stocks or securities traded on an established securities market and a gain that is recaptured under IRC Section 1245. If an ordinary gain is incurred through depreciation recapture, it must be recognized in the year of the sale even if no cash is received.

106. Set up a captive insurance company to realize insurance cost savings. For certain groups, setting up a small “captive” insurance company, which is owned and controlled by the insureds, may result in insurance savings, particularly when there is a high loss ratio anticipated from claims. In addition, small captives qualifying under IRC Section 831(b) (known as “microcaptives”) pay income tax only on investment income, not underwriting income, and have dividends taxed as qualified dividends. Note that Section 831(b) does contain some restrictions; for example, the insurance company must have net written premiums (or, if greater, direct written premiums) for the taxable year that do not exceed $2.2 million. Generally, these captives are set up among related companies, companies within the same industry or companies affiliated with some association. Microcaptive insurance companies continue to come under increased IRS scrutiny, so it is imperative that you consult with professionals before setting one up.

107. Lease modifications may generate unintended tax consequences. With the fluctuating real estate market of the past few years, many businesses have entered into lease modification negotiations with their landlords. However, businesses should look at potential tax impacts. IRC Section 467 was originally enacted as an anti-abuse provision to prevent tax shelters that took advantage of certain timing differences. Leases can be governed under Section 467 in the event of modification and can result in the inclusion of income if lease terms are substantially modified by:

  • Increasing/decreasing the lease payments;
  • Shortening/extending the lease term; and/or
  • Deferring/accelerating lease payments due.

Moving forward, lease modifications will remain a very complicated issue. It is important to remember that regardless of what the modifications are, leases must be reported on an accrual basis. Comprehensive contract analysis and Section 467 testing will be required on a case-by-case basis as lessors and lessees continue to modify leases to get the best deal.

108. Fly solo with a one-participant 401(k). A solo 401(k) is a one-participant 401(k) similar to a traditional 401(k), except that it covers only the business owner or owner plus spouse. For the most part, these plans have the same rules and requirements as any other 401(k) plan. The business owner is both employee and employer in a 401(k) plan, and contributions can be made to the plan in both capacities allowing for employer contributions, elective deferrals and catch-up contributions. For 2023, the solo 401(k) total contribution limit is $66,000, or $73,500 if you are age 50 or older. The owner can contribute both:

  • Elective deferrals up to 100 percent of compensation (earned income in the case of a self-employed individual) up to the annual contribution limit ($22,500 for 2023, plus $7,500 if age 50 or older); and
  • Employer nonelective contributions up to 25 percent of compensation as defined by the plan (for self-employed individuals the amount is determined by using an IRS worksheet and in effect limits the deduction to 20 percent of earned income).
Planning Tip—Because solo 401(k) plans cover only highly compensated employees (i.e., the owner) they are not subject to the actual contribution percentage (ACP) and actual deferral percentage (ADP) tests and can therefore be easier and less expensive to maintain than other 401(k) plans.
Observation—It is important to keep track of the value of the assets within a solo 401(k). Though they do not require ACP or ADP testing, one-participant 401(k) plans are generally required to file an annual report on Form 5500-EZ if the plan has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement. Please track and report to the fund administrator the asset value and make sure any Forms 5500 are timely filed. If you have an established solo 401(k) plan, experienced significant appreciation due to market gains and are unsure if a Form 5500 has been filed, please contact your tax adviser as soon as possible.

109. Document your business expenses. For every item you put on a tax return, you should be ready to prove that item’s validity to the IRS, state or even local tax authority. In particular, certain expenses like travel, meals, transportation expenses, gifts, entertainment (if applying to state or wages of employee) and those expenses associated with listed property (e.g., vehicles) are subject to more specific and demanding rules regarding substantiation and documentary evidence. Deductions in these categories can be disallowed, even if valid, if contemporaneous evidence is not properly maintained for the expense that includes:

  1. The amount of the expense,
  2. The time and place of travel,
  3. The business purpose,
  4. For gifts, the date and a description of the item given and the business relationship to the taxpayer of the person receiving the gift, and
  5. The business relationship to the taxpayer of the person receiving the benefit.
Planning Tip—To meet the adequate records requirement, you could maintain (1) an account book, diary, log, statement of expense, trip sheets or similar record as well as (2) documentary evidence that, in combination, are sufficient to establish each element of an expenditure or use for travel. However, it is not necessary to record information in an account book, diary, log, statement of expense, trip sheet or similar record that duplicates information reflected on a form of documentary evidence as long as they complement each other in an orderly manner.

Documentary evidence (paid bill, written receipt or similar evidence) is required to substantiate all expenses of $75 or more. A written receipt is always required for lodging while traveling away from home, regardless of the amount. However, for transportation charges, documentary evidence is not required if not readily available (e.g., cab fare).

Observation—A credit card statement is not sufficient documentary evidence of a lodging expense. Instead, a hotel bill showing the components of the hotel charge is required.

110. Claim a small businesses credit for starting a pension plan. In the current environment where retaining good employees is critical for business survival, Congress has allowed a credit equal to 50 percent of certain costs incurred when setting up a pension plan for employees. The credit is generally limited to $250 per employee per year, but the limit is no less than $500 and no more than $5,000. So, if you spend $12,000 this year in establishing a plan and $11,000 in the next two years on administration and employee education, you would be eligible for a $500 credit against your taxes in each of those three years if you have one employee, a $1,250 credit if you have five employees, and a $5,000 credit if you have 25 employees. (Before 2020, the limit was $500 a year and did not increase based on the number of employees.)

To qualify for this credit, taxpayers must:

  • Have no more than 100 employees who received at least $5,000 of compensation in the year before starting the plan;
  • Have at least one employee participate in the plan who meets the definition of a “nonhighly compensated employee”; and
  • Not have had a pension plan during the three tax years right before the year in which the plan starts.
Observation—With the introduction of the SECURE Act 2.0 late last year, this credit was further sweetened for employers with 50 or fewer employees, which may be able to claim up to 100 percent of plan start-up costs, effective January 1, 2023.
Planning Tip—Businesses that have had a pension plan in the last couple of years may consider waiting three years from the time the plan was terminated before starting a new plan in order to qualify for the credit. As an example, if you had a plan that was terminated in 2020, you would have to wait until 2024 to start a new plan and qualify for the credit. Also, it is important to consider that any expenses utilized in determining this credit cannot also be deducted as regular business expenses. While credits typically are more advantageous than deductions because they represent a dollar-for-dollar reduction in tax liability, the limitations on this credit could result in a situation where deducting the costs as business expenses would maximize the tax benefit.
Observation—There are several types of plans you can establish for your employees and still qualify for the credit. For example, you could start a pension, profit sharing or an annuity plan, among other choices. If you think the time is now to establish one of these plans, please reach out to your tax adviser.

111. Reward past employee education with an excluded tax benefit. Do you want to help ease the minds of your employees while retaining their talent and recognizing the costs incurred for them to obtain that talent? Ask your tax adviser about a 127 plan!

A 127 plan is a tool available to any employer for offering tax-exempt tuition benefits to their employees. Through 2025, this plan allows employers to exclude from an employee's gross income any payments made by an employer of principal or interest, up to $5,250, on any qualified education loan incurred by the employee. To qualify, the employer is required to inform all eligible individuals, ensuring that there is no discrimination in favor of highly compensated employees or the restricted ownership class. Qualified student loan payments must be aggregated with any other educational assistance received by the employee when applying the statutory maximum of $5,250.

Planning Tip—If you are seeking to retain talented employees with varying levels of student loans, this is a great avenue to reward your employees tax-free. They will feel compensated by receiving a debt payment on their outstanding loans while incurring no gross income.

112. Utilize a private foundation to accomplish charitable goals. While donor-advised funds are increasingly popular among philanthropic individuals, private foundations may offer certain advantages to families looking to create a multigenerational plan for charitable giving. Since private foundations can exist in perpetuity, they are an excellent vehicle to carry on a founder’s family name. Generally, donor-advised funds are not legally separate from the 501(c)(3) sponsoring organization and may have time limits. Further, while donor-advised funds usually follow a donor’s direction in gift giving, they are not legally required to follow those wishes. Private foundations may provide donors with greater flexibility in gift giving.

Donors can realize immediate tax benefits through an income tax deduction when contributing cash amounts to a private foundation. This deduction can be up to 30 percent of adjusted gross income (AGI). For noncash contributions, the deduction is capped at 20 percent of AGI in most instances. However, in certain cases, a conduit (pass-through) foundation can be used, which would allow charitable deductions of up to 60 percent of AGI.

Observation—Private foundations are not without their limitations. Excise taxes are assessed annually on investment income, and foundations must distribute 5 percent of their assets each year. In 2020, the excise tax rate for private foundations was reduced to 1.39 percent of net investment income rather than the previous 2 percent, with a further reduction to 1 percent in certain cases.

We can assist you, based on your unique situation, in determining whether a private foundation is a good fit for you.

113. Beware of the recapture of tax benefits on property not used for an exempt purpose. When a donor makes a charitable contribution of tangible personal property that is not used for exempt purposes and the donor originally claimed a deduction for the fair market value of the property, the donor’s tax benefit may need to be adjusted.

If a donee organization disposes of applicable property within three years of the contribution of the property, the donor claimed a deduction of more than $5,000, and the organization does not certify that the property was substantially used for the organization’s exempt purpose or the intended use became impossible, the donor is subject to a tax benefit adjustment.

If the donation is significant, the donor may consider formalizing the donee organization’s strategy regarding the property or ask the donee organization to indemnify the donor.

A $10,000 penalty applies if a person fraudulently misidentifies property as having a use that is related to either a purpose or function of the organization. Such a situation may require the donor to recapture a portion of the deduction, and include in income the difference between the amount previously claimed as a deduction less the donor’s basis in the property when the contribution was made (the built-in gain).

114. Confirm that your private foundation meets the minimum distribution requirements. All private foundations are required to distribute approximately 5 percent of the average fair market value of their assets each year. Qualifying distributions meeting this requirement include grants, administrative expenses related to the charitable activity and other specified operating expenses. The foundation has 12 months after the close of the tax year to make their qualified distribution. If the distribution requirement is not met within that timeframe, an excise tax of 30 percent will be imposed.

115. Review your estate planning documents. At year-end, individuals are presented with a strategic opportunity to evaluate their wealth and estate planning strategies. Considering the potential expiration of key provisions in the TCJA, estate plans should be crafted with maximum flexibility. Formula bequests need scrutiny to ensure their relevance under current and expected future laws. Additionally, contemplating the granting of limited powers of appointment to trust beneficiaries can offer post-mortem tax planning flexibility.

There has been a lot of speculation regarding potential legislation and significant reductions to the federal estate, gift and generation-skipping transfer unified credit that was previously doubled by the TCJA. While proposed changes may have been abandoned, at least for the time being, the increased exemptions are still scheduled to sunset in just over two short years. In anticipation of the future changes, if you have not examined your estate plan within the last few years, you should consider doing so immediately. Without intervention, the favorable changes enacted by the TCJA will lapse back to their pre-2018 amounts at the end of 2025 (the unified credit will be reduced by over $6 million after considering inflation).

While addressing your will, also consider the benefits of a living will, medical power of attorney, healthcare directives, durable power of attorney and the appropriateness of your beneficiary designations on your retirement accounts and life insurance policies.

Planning Tip—One easy step to take in reducing your exposure to the estate tax is to make annual gifts before the end of the year. In 2023, an unmarried donor may now make a gift of $17,000 to any one donee, and a married donor may make a gift of $34,000 to any one donee as the gift can be considered split with his or her spouse without using any of their unified credit or incurring a gift tax. Thus, a gift of $68,000 may be made by a husband and wife to another married couple, free of gift tax and with no impact on the unified credit. In 2024, the annual gift tax exclusion increases to $18,000, so a married couple will be able to similarly gift $36,000 to an individual and $72,000 to a married couple. Additionally, the IRS has issued a regulation that stipulates that all gifts sheltered under the current rules will remain so even if the law is subsequently changed. This means that if a reduction in the unified credit occurs, either due to the sunset of the TCJA or the passage of new legislation, and the taxpayer gifts over $10 million under the current rules, they would not be retroactively taxed if they pass away once the unified credit is lower.

Keep in mind that medical and education expenses paid directly to a providing institution are not subject to gift tax. In addition, as indicated in the education planning section of this guide, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment, as discussed earlier in item 49.

116. Take advantage of high exclusions. As discussed above, in 2023, individuals now have the option to give up to $17,000 per year to another individual without impacting their lifetime exemption ($34,000 for married couples). This limit will rise to $18,000 ($36,000 for couples) in 2024. Such gifts can be transferred directly to the donee or directed into trusts, custodial accounts or 529 college savings plans. Notably, the latter choice permits the frontloading of up to five years' worth of annual exclusions. The estate and gift tax unified credit amounts are also subject to inflation adjustments and will rise to $13.61 million in 2024. For both simple and complex trusts, grantors should consider funding in 2023 or 2024 to take advantage of this credit, since it is scheduled to sunset on January 1, 2026.


Illustration—Gifts are generally only subject to the gift tax under limited circumstances. For example, suppose Mary funds an irrevocable trust for the benefit of her daughter. Mary was never married. In 2023, she contributes $1.017 million to the trust. The first $17,000 of any present interest gift in 2023 can pass freely to the recipient without consuming any of Mary’s lifetime credit. When a gift is made to a trust, a gift tax return must be filed for the year, but no gift tax is paid unless the gift exceeds Mary’s remaining lifetime unified credit. Since Mary has made no gifts exceeding the annual exclusion amount during her lifetime and has never filed a gift tax return to reduce her unified credit, she would reduce her $12.92 million credit by $1 million, resulting in no taxable gift, no tax liability and the removal of appreciated assets from her estate. (The entire amount of the $1 million gift was offset by the unified credit.)




Annual exclusion



Unified credit



Taxable gift


Gift tax due


Credit before gift


Credit used toward gift

$1,000,000 (a)

Credit remaining


(a) $1,017,000 gift less annual exclusion of $17,000 = $1 million credit used

Observation—Although major tax legislation seems unlikely with a split Congress, there remains an impending threat that taxpayers passing away after 2025 who had gifted more than the inflation adjusted $10 million exclusion would face a “clawback” of the gift tax exclusion upon death. To mitigate this fear, the IRS previously released final regulations stating that, to the extent a higher exclusion amount was allowable as a credit in computing gift tax during the decedent’s life, the sum of these credits used during life may be used as a credit in computing the decedent’s estate tax. For example, if a taxpayer utilized the entire $12.92 million credit for 2023 gifts, and the decedent dies in 2026 after the credit is reduced to $6.8 million (adjusted for inflation), the entire gift of $12.92 million would still be excluded at the taxpayer’s death in 2026 or beyond. Therefore, it may make sense to fully utilize the current credit over the next few years.
Planning Tip—All of the strategies and observations noted in this guide are aimed at minimizing your income and gift tax costs. In other words, it is important to ensure that your current and future wealth is not unduly diminished by those taxes. We strongly recommend that you consult with estate planning professionals to discuss topics such as gift, estate and generation-skipping transfer tax unified credit, the unlimited marital deduction, each spouse’s credit and related items.</span

117. Consider gifting income-producing or appreciated property. By gifting income-generating or appreciated property in lieu of cash, the donor can accomplish three important benefits. First and most importantly, the gift will serve the purpose of assisting the donee. Second, if the donee is in a lower tax bracket than the donor or exempt from the NIIT, the donor and donee will likely experience some collective tax savings by shifting the income to a lower bracket. Third, the value of the gift is also removed from the transferor’s estate. This is an easy, effective way to pass on wealth.

118. Consider making payments for tuition or medical expenses. Medical and education expenses paid directly to the providing institution are not subject to gift tax and generation-skipping transfer tax rules. Also, any such payments do not count toward the taxpayer’s annual gift tax exclusion. In addition, contributions to Section 529 plans may also qualify for special gift tax exclusion treatment. For example, should a grandparent make tuition payments and utilize up to $16,000 in gift exclusions to a grandchild, the yearly tax savings could be significant. Notably, these payments can be on behalf of anyone and are not restricted to immediate family members.

119. Utilize a spousal lifetime access trust (SLAT) to take advantage of current, high unified credits. As we mentioned previously, it is likely that the unified credit is near its historical peak, with the current credit scheduled to sunset in 2026 and revert to an inflation adjusted $6.8 million. In order to take advantage of the current heightened credit, married persons can each gift the amount of the credit to a SLAT, utilizing the credit on the gift and paying no gift tax. In a SLAT, after the donor spouse gifts to the trust, the donee spouse can request distributions of income or principal from the trust, thus preserving access for the couple to the trust assets, should the need arise. However, if principal is distributed, the SLAT assets distributed will be brought back into the estate, defeating the original intent of forming the SLAT―so exercise caution when taking distributions. Upon the donor spouse’s death, the assets in the trust (and subsequent appreciation) are not subject to the estate tax.

Planning Tip—If you are trying to provide for a nonresident spouse, a qualified domestic trust (QDOT) may be appropriate. Under the estate tax, a noncitizen surviving spouse is generally not entitled to the same marital deduction afforded to citizen spouses. To circumvent this roadblock, the U.S. spouse can transfer assets to a QDOT, which defers the federal estate tax following the death of the first spouse until the death of the surviving noncitizen spouse. The surviving spouse may receive income from the trust, but any distributions of principal may be subject to estate tax except in certain hardship situations. Upon death of the surviving spouse, the assets of the QDOT will finally be subject to the estate tax. Incidentally, the annual exclusion for gifts to a noncitizen spouse is increasing from $175,000 in 2023 to $185,000 in 2024.

120. Tread carefully when considering the use of a grantor retained annuity trust (GRAT) for inter vivos wealth transfer. In a GRAT, a grantor contributes assets to a trust while retaining annuity payments for a defined period of time, with the remainder payable to beneficiaries. Depending on the structure of the GRAT, one can achieve maximum wealth transfer with little to no gift tax effect or use of the lifetime exclusion. However, should the grantor pass away prior to the completion of the annuity payments under the GRAT, at least a portion and possibly all of the GRAT assets are includible in the grantor’s estate. Thus, by terminating the annuity and trust before December 31, 2025, when the new higher federal estate tax threshold is set to expire, one can reap all of the benefits of a GRAT with minimal risk, while retaining the use of the grantor’s applicable exclusion amount.

Observation—GRATs generally perform best in low-interest rate environments. Since interest rates are at their highest points in the past 20 years, GRATs may have lost some of their luster. However, GRATs remain a conservative way to manage valuation risk and are particularly attractive for assets that anticipate significant appreciation during the annuity period.

121. Retain access to your home while passing it down to the next generation by utilizing a qualified personal residence trust (QPRT). By transferring a house to a QPRT, the grantor can continue to use the residence as his or her own for a specified period, after which the residence passes to the beneficiaries. At this point, and depending on the terms of the trust, the grantors may pay rent to remain in the home. The initial transfer to the QPRT is a taxable gift of the remainder interest in the home, using a rate published by the IRS. A QPRT allows the grantor to gift the home to the trust for a discounted value, using less of the exclusion, and shields future appreciation of the home from the estate tax. This is a particularly effective strategy in a high-interest rate environment because the higher the rate, the higher the present value of the grantor’s right to use the residence―and the lower the value of the gift of the future remainder interest.

Illustration—Your home, initially valued at $1 million, has been transferred to a QPRT with a term length of 10 years, and your daughter is named as the beneficiary. Over the decadelong term, the home's value increases by $500,000. This appreciation in value remains tax-free due to the protective umbrella of the QPRT.

When the QPRT term concludes and the house transfers to your daughter, any potential gift and estate tax will be calculated based on the original value of $1 million. This arrangement allows for the tax-free growth of the property's value during the QPRT period, providing a strategic advantage in passing on the asset to your daughter while minimizing potential tax implications.

122. Gift or sell assets to an intentionally defective grantor trust (IDGT). By gifting assets to an IDGT, donors can effect a completed gift during their lifetime, which would use up some of their gift tax exemption, but shield appreciation in the assets from the estate and gift taxes. Because of this, this strategy is best employed by gifting assets that are expected to increase the most in value.

Planning Tip—Pennsylvania law differs from federal law regarding grantor trusts. But that will soon change. On December 14, 2023, Governor Shapiro signed Senate Bill 815, which amended the Pennsylvania tax code by adding subparagraph (c) to 72 P.S. §7302. Beginning January 1, 2025, Pennsylvania will join 49 states and the District of Columbia in recognizing grantor trusts. Effective for tax years starting after January 1, 2025, 72 P.S. §7302(c) provides that income received by a Pennsylvania resident trust, or by a nonresident trust from sources within Pennsylvania, that is a grantor trust for federal income tax purposes will also be taxable to the grantor for Pennsylvania income tax purposes, regardless of whether income is distributed to the beneficiaries. Unfortunately, this change will not apply to trusts for tax years 2023 or 2024. We expect tax filing and related guidance from the Pennsylvania Department of Revenue in due course. We expect many benefits from this change, including reduction in administrative effort and tax complexity which results from the different treatment of grantor trusts for PA and federal income tax purposes. Additionally, we expect planning opportunities, mostly in connection with transactions between grantors and the grantor trusts (e.g., loans, sales, swaps, certain tax credit opportunities, among others).

123. Utilize a charitable remainder trust (CRT) or a charitable lead trust (CLT) to transfer wealth and benefit charity. As you would expect, both trusts involve the donation of a portion of the assets transferred into the trust to charity, but the timing and functions of both are very different. Both a CRT and CLT permit the donor to remove the asset from their estate. The differences arise in the areas of recipients of the annuity payments and the distribution of the remaining funds.

A CRT is created to ensure the donor’s financial future. Under a CRT, appreciating assets such as stocks are contributed to the trust and the donor receives an annuity for a term of years, even though the asset is no longer considered as part of the donor’s estate. Upon the donor’s death, a charitable organization receives the remaining assets.

A CLT is predominantly focused on the tax-efficient distribution of the donor’s wealth to beneficiaries. First, the donor makes a taxable gift equal to the present value of the amount that will be distributed to the remainder beneficiaries. In a CLT, the charities “lead” and receive the annual annuity payments. The amount remaining at the completion of the term is then distributed to the beneficiaries. The benefit of this type of trust is threefold: It allows for the reduction in the value of the settlor’s estate, while also providing for charities and beneficiaries.

Planning Tip—CRTs are more advantageous in a high-interest rate environment because higher interest rates result in a higher valuation of the future charitable remainder interest and gives the grantor a higher charitable income tax deduction. Unlike CRTs, CLTs are more advantageous in a low-interest rate environment. With interest rates at 20-year highs, we recommend consulting with your tax adviser to determine which strategy is right for you.

124. Review trust residency qualifications often. The most difficult aspect of trust residency is that each state has different rules and qualifications for determining whether a trust is resident or nonresident. For example, most trusts created by a will of a decedent or funded while the donor was considered a resident of Pennsylvania are considered resident trusts. However, a state like Kansas only considers a trust as resident if it is administered in the state. Each state and situation differs for trust taxation and laws are constantly changing. There is a myriad of other factors that may impact the nexus of a trust, such as beneficiary and/or trustee residence. We recommend contacting your tax adviser on any questions regarding trust residency.

125. Set up new intra-family loans while refinancing existing loans. Intra-family loans can still be beneficial for both the borrower/donee and the lender/donor. In this situation, the lender would be required to charge the minimum applicable federal rate. As of December 2023, that rate ranged between 4.82 percent and 5.26 percent, depending on the term. With volatility in the markets and high interest rates, it is not likely that borrowers would choose to invest proceeds and try to “beat” the intra-family loan rate at this time. However, if a donor chose to loan a beneficiary money to buy a home, with average mortgage rates currently anywhere between 6.7 percent and 7.6 percent, there is room to make an arrangement beneficial for both parties. For the donee, if the loan is secured and properly recorded, it could be deductible on their tax return, while likely paying significantly less than what would be charged by a typical lending institution. For the donor in a volatile stock market, the mortgage could very well generate a better rate of return than a standard investment could, all while secured by real property.

Observation—Generally, only certain types of interest payments are deductible by a borrower. If the funds from the intra-family loan are used for purposes such as starting a business, making investments or acquiring a home, the interest payments may qualify for deduction by the borrower for income tax purposes. However, it is essential to note that interest payments cannot be deducted if the loan is utilized to settle credit card debt, cover personal expenses or repay an unsecured home loan.

The lender bears the responsibility of ensuring that appropriate tax forms are issued to the borrower, as applicable. The rules around deducting interest payments by borrowers are intricate, and are why taxpayers need to seek guidance from their tax preparers in order to ascertain whether interest payments may be deductible based on their specific circumstances.

126. Consider the benefits of a revocable trust. Generally, wills are drafted to specify how an individual’s assets should be distributed upon their death. However, a revocable trust can provide numerous advantages over a will. One significant benefit is the avoidance of the probate process, which is the process of the legal administration of a person’s estate in accordance with that person’s will or their state of domicile’s law if there is no will in place. Having a revocable trust eliminates any uncertainties that may arise within the probate process. Additional benefits of revocable trusts include the addition of privacy to the estate plan and protections against incapacity.

127. Utilize life insurance properly. Whether intended to pay estate taxes, protect the family of a deceased “breadwinner” or fund ongoing business structures, there are many reasons why taxpayers should obtain life insurance. Typically there are two different types of life insurance policies taxpayers may select: term life insurance, which provides coverage over a specific period of time (the most popular option being “premium level”), and permanent life insurance, which provides coverage until the taxpayer dies or cancels the policy. A few examples of permanent life insurance include whole, universal and variable.

While life insurance may not be for everyone, it is worth looking into to see if your situation would benefit from it. For instance, business owners may want to guarantee they will be able to continue functioning after the loss of an important employee, or ensure survivor income for the deceased’s family. In addition, the business may want to provide inheritance for family members who are not directly involved with the business. In terms of estate taxes, high-net-worth individuals may still be plagued with a financial burden after the death of a taxpayer. Those electing to use insurance proceeds in order to provide cash for the estate tax payment may soften the blow of having to resort to using other tactics, such as liquidating assets.

A taxpayer may also choose to establish an irrevocable life insurance trust, whereby the policy is considered an asset of the trust and ownership is effectively transferred to another person. Then, upon death, the benefits are not included in the decedent’s estate. Otherwise, the life insurance may be taxed in the deceased’s estate based upon the value of the death benefit, even for term insurance.

The advantages of acquiring life insurance within an irrevocable trust can be amplified when a married couple opts for the trustee to purchase a second-to-die life insurance policy. Typically, the cost of such a policy is lower than that of two individual single-life policies. Consequently, with the same premium, it becomes possible to secure a larger amount of coverage. This approach not only provides potential cost savings but also aligns with estate planning strategies, as the death benefit is triggered upon the passing of the second spouse, offering protection for heirs and assets within the trust.

When deciding who should fund the life insurance premiums, keep in mind that if a business owner is funding the premiums, there could be various related income tax issues. In addition, gift tax issues could arise if a life insurance trust is already set in place. For those reasons, it is imperative that taxpayers consult with a trusted tax adviser in order to determine what structure would work best for their specific situation.

128. Minimize the income taxes applicable to estates and trusts. The income tax rates that apply to estates and trusts continue to be significantly compressed. Estate and trust taxable income (exclusive of long‑term capital gain and qualified dividend income) of more than $14,450 for 2023 is taxed at a marginal tax rate of 37 percent. Therefore, it may be beneficial to distribute income from an estate or trust to its beneficiaries for the purpose of shifting the income to a lower tax rate. Additionally, trusts and estates can minimize income taxes by utilizing many of the tax planning strategies that are applicable to individuals, including the “bunching” of deductions and deferral of income strategies noted above in items 14 and 22.

2023 Ordinary Income Tax Rates Applicable to Estates and Trusts

Taxable income

Tax rate

$0 - $2,900


$2,901 - $10,550


$10,551 - $14,450


Over $14,450



129. Consider an election under the 65-day rule. Considering the compressed brackets with extraordinarily high tax rates on income held within a trust or estate, it is advantageous in many scenarios to lessen the total income tax hit for the trust by distributing income to be taxed at the beneficiary level instead of the entity level.

With an election under Section 663(b), complex trust and estate distributions made within the first 65 days of 2024 may be treated as paid and deductible by the trust or estate in 2023. The election of the 65-day rule is an invaluable asset, giving the trustee the flexibility to distribute income after the end of the year, once the total taxable income of the trust or estate can be more accurately determined.

130. Consider private placement life insurance as a hedge fund alternative. Investors with significant income and wealth should consider private placement life insurance (PPLI). This is an unregistered security that typically utilizes strategies associated with alternative investment funds; however such funds are generally subject to high tax rates as many investments are made on shorter time horizons. A PPLI can help reduce the tax cost associated with investment in these funds, as assets can grow in the life insurance policy tax-free. PPLIs may be a particularly attractive alternative for those in states with higher taxes, like New York and California. PPLIs typically require funding of $3 million to $5 million in premiums per year.

131. U.S. citizen residents of a foreign country should consider the foreign earned income exclusion. U.S. citizens who spend a significant amount of time out of the country and meet either the physical presence test or bona fide residence test can exclude up to $120,000 of income and some additional housing costs by using the foreign earned income exclusion. Employees and self-employed individuals can both potentially take advantage of this approach. There are several strategies to avoid double taxation for citizens with foreign income, and this approach is ideal for many of those at an income near the exclusion maximum. Your tax adviser can help you determine if you qualify and if this is the best personalized strategy to utilize.

132. Review your foreign bank account balance during 2023 for FBAR preparation. If you have financial interest, whether direct or as owner of record, or signature authority over foreign financial accounts with aggregate balances over $10,000 at any time during 2023, you are required to file FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Willful failure to report these accounts can result in penalties of up to $156,107 or 50 percent of the account value, whichever is greater, on a per account basis.

Recently, in Bitter v. United States, the Supreme Court held that a nonwillful reporting violation constitutes a single violation, regardless of the number of unreported or incorrectly reported accounts, and not a per account violation, and the penalty for such nonwillful violations is to be capped at $10,000. The applicable sections of the IRM have not been updated yet, but a memorandum (SBSE-04-0723-0034) has been issued advising of the new guidance.

While the reporting of virtual currency was not previously required, the Treasury Department has signaled its intention to amend the disclosure requirements of virtual currency accounts held overseas. FinCen Notice 2020-2 stated that while the current regulations do not define a foreign account holding solely virtual currency as a type of reportable account for FBAR purposes, if the account that holds the virtual currency is an otherwise reportable account, the total holdings must be reported.

If you are required to file an FBAR, in addition to completing Schedule B, Part III (Form 1040), you should also review the filing requirements related to Form 8938, Statement of Specified Foreign Financial Assets. Form 8938, while reporting similar information with respect to foreign financial accounts, has different filing thresholds and slightly different asset reporting requirements than the FBAR.

133. Maximize your foreign tax credit. For many taxpayers, the most exposure to international tax is paying foreign taxes on investment and other income earned abroad. While in many cases the calculation of a foreign tax credit is a straightforward affair, recent and proposed regulations have made modifications to the source-based requirements for certain taxes, as well as calculation of the net income subject to tax, and consequently, the availability of the credit for many taxpayers. An experienced tax preparer can assist to ensure you and your business receive maximum credit for the foreign taxes you pay.

134. Avoid unintentional foreign trusts. Typically, a trust is viewed as a domestic entity for tax purposes if a U.S. court primarily oversees its administration and one or more U.S. individuals have the power to make all significant decisions. Therefore, it is crucial to think about not just the location of the trust’s formation, but also who will be in charge of the trust. If a nonresident alien successor trustee takes over, or even a U.S. citizen if the assets are under foreign court jurisdiction, a U.S. trust could transform into a foreign trust when the original trustee passes away or steps down from their role. This change in classification could lead to significant alterations in U.S. and foreign reporting obligations, and may also have potential implications at the state level.

135. Reevaluate transfer-pricing policies in light of supply chain issues and current market conditions. As we have predicted for the last two years, due to the global pandemic, many multinationals have faced severe disruptions to their global supply chains, resulting in new suppliers, temporary options, alternative means of performance, the restructuring of supply contracts and, in some cases, relocation of operations. In addition, recent surges in interest rates and market volatility may necessitate revisiting the terms and conditions of intra-group transactions. Taxpayers may wish to restructure or reprice interest rates in order to maximize available cash flow or defer certain inter-company payments, as well as increase their competitive position when operating in international jurisdictions. In October 2023, the IRS launched a new “Large foreign owned corporations transfer pricing initiative,” using funds from the Inflation Reduction Act to increase audits of large corporations to ensure that they are paying taxes owed.

While the economic landscape remains uncertain for 2024 and beyond, we do have a great deal of tax certainty as to 2024 and, to a certain extent, 2025. Taxpayers should utilize this clarity in designing a tax plan for the next few years while also preparing for the potential sunset of the TCJA. As we have seen the IRS begin utilizing their increased budget from 2022’s Inflation Reduction Act, taxpayers should ensure that they maintain adequate records and plan for any potential audit scenarios. As year-end plans are developed, caution should be exercised. While many of the 2023 tax savings opportunities will disappear after December 31, 2023, strategies should not be adopted hastily. However, with careful consideration and by investing a little time in tax planning before year-end, you can both improve your 2023 tax situation and establish future tax savings. Without action, however, you may only discover tax saving opportunities when your tax return is being prepared—at which time it may be too late.

If you would like to discuss the strategies and concepts indicated herein or have other concerns or needs, please do not hesitate to contact John I. Frederick, Michael A. Gillen, Steven M. Packer or the Tax Accounting Group practitioner with whom you are in regular contact, as well as trust and estate attorneys David S. Kovsky and Erin E. McQuiggan of the firm’s Private Client Services Practice Group. For information on other pertinent topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.