Year-end Tax Planning for 2023 is a Good News/Bad News Story

By: Paul Wilkin, CPA & Jason Luksis

Key Takeaways:

• Most taxpayers will see few changes in taxes due to minimal changes to tax code.
• Inflation Reduction Act and SECURE 2.0 Act brought some tax credits for energy savings and retirement plans.
• Businesses should review finances, consider SALT workarounds, retirement plans incentives, and bonus depreciation.
• Individuals could still benefit from healthcare, charitable deductions or energy tax credits if eligible.
• Having a tax advisor review situations can help taxpayers maximize savings.

Most Taxpayers Will Notice Few Changes

Year-end tax planning for 2023 is a good news/bad news story for most taxpayers. The good news is that there were very few changes in the tax code that would change the way taxpayers prepare for tax season, and those that do exist are generally taxpayer friendly. The bad news is that you still have to do some year-end tax planning and preparation.

The most significant changes in 2023 were due to two pieces of legislation that were enacted in 2022 for which certain provisions took effect this year. The first was the Inflation Reduction Act, which provides several tax credits for putting energy efficient equipment into service in 2023. The second was the SECURE 2.0 Act, which expanded incentives for businesses to offer 401(k) plans and for employees to participate in them.

Additionally, certain provisions of the Tax Cuts and Jobs Act (TCJA) continue to influence year-end tax planning. It should be noted that numerous provisions of the TCJA are scheduled to expire as of December 31, 2025. Though these items do not impact taxpayers this year, it could be relevant to start planning for when they do expire.

Year-end Tax Planning for Businesses

In general, businesses should include the following in their year-end planning:

• Review your financial statements, including: accounts receivable and accounts payable, inventory, fixed assets, payroll and all estimated tax payments. Make sure your records are accurate and up to date.
• If your business is a pass-through entity such as an S corporation, LLC or partnership, consider whether to take advantage of state laws enabling you to “workaround” the federal limit on deductions of state and local (SALT) taxes, if you are not already doing so. Illinois is one of 35 states that have enacted the “PTE” workaround laws.
• Small businesses that do not currently offer 401(k) plans should consider the tax incentives offered by the SECURE 2.0 Act that significantly cut the costs of offering retirement plans for small businesses. These incentives are effective for the 2023 tax year.
• If you do have a 401(k) plan, we recommend reaching out to all participants annually (year-end is a good time) to update their contact information. For participants who no longer work at your company, this is a good time to remind them they have balances in your 401(k) and they might want to roll the funds over into an IRA or into their current employer’s retirement plan.
• If your business is planning to purchase equipment, try to put it in service before the end of the 2023 year to qualify for 80% bonus depreciation. The bonus depreciation rate falls to 60% after December 31, 2023.
• Take advantage of higher Section 179 limits for 2023. Section 179 of the Internal Revenue Code (IRC) allows businesses to take an immediate deduction for business expenses related to depreciable assets such as equipment, vehicles and software. This lowers a business’s current-year tax liability rather than capitalizing an asset and depreciating it over time in future tax years. The dollar limitation for 2023 is $1.16 million and the investment limitation is $2.89 million. Amounts above those limits phase out dollar for dollar up to a maximum of $4 million. For a greater tax benefit, you may be able to combine bonus depreciation with Section 179 treatment.
• Review your situation with regard to SALT – state and local taxes. Did your company hire new employees who live in other states, or gain new customers in other states? Both of these developments can subject your company to income tax liability, sales and use tax or franchise tax liability. Inform your tax advisor before the end of the year about any multi-state activities so the tax impact can be evaluated.
• Make sure your estimated tax payments are current with the federal government and all states in which you have tax liability. Beware that Illinois this year raised its underpayment penalty to 8%, so paying on time isn’t enough – you must be sure your company has made deposits based off a recent projection of net income.
• If you are adding vehicles to your company’s fleet, consider the tax incentives in the Inflation Reduction Act for adding electric vehicles. Each vehicle qualifies you for a $7,500 tax credit.
• Maximize your cash flow and profitability by budgeting and forecasting for the coming year. Budgeting and forecasting can help you find opportunities to minimize taxes and keep more of the money you make. It’s a business strategy that drives wealth creation. Contact your KRD advisor for help with budgeting and forecasting.

Year-end Tax Planning for Individuals

Year-end planning for individuals used to involve making charitable contributions and checking the performance of investments to see if you needed to defer income until after January 1. But the higher standard deduction ushered in by the TCJA made itemizing a thing of the past for millions of taxpayers. Still, there are tax-saving strategies that can work in certain circumstances.

• For instance, healthcare costs are deductible to the extent that they exceed 7.5 of your adjusted gross income. That’s a high hurdle for most taxpayers, but if you have had a major medical event in the past year, your co-pays and deductibles, combined with insurance premiums and other minor healthcare items like dental work, may qualify you for a deduction.
• Likewise, the high standard deduction made deductions for charitable contributions inaccessible for most taxpayers. However, some taxpayers now “bundle” their contributions – making large donations every two to three years rather than smaller donations each year – to take advantage of the deductibility. If you typically make significant donations, talk to your tax advisor about this strategy.
• Have you installed new doors and/or windows in your home this year, or are you planning to do so? If they are energy efficient, you may qualify for a 30% tax credit under the Inflation Reduction Act.
• The Inflation Reduction Act also provides a 30% tax credit for installation of solar cells, battery storage and even residential wind turbines, effective for the 2023 tax year.

Tax season will be here before you know it. Be prepared. If you would like help making sure your business or personal tax situation is in a strong position, contact your KRD advisor.

2024 Tax Brackets

2024 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households

2024 Standard Deduction

2024 Alternative Minimum Tax (AMT) Exemptions

2024 Capital Gains Tax Brackets