Given the current rise in interest rates, inflation, and market volatility, it has become increasingly crucial for taxpayers to engage in tax planning. This is especially important for those who aim to effectively manage their cash flow while minimizing their tax liabilities in the long run. As we approach the end of the year, it is an opportune time for individuals, business owners, and family offices to carefully assess their tax situations for 2023 and 2024. By doing so, they can identify valuable opportunities to decrease, postpone, or expedite their tax obligations.
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Individual Tax Planning Highlights
2023 Federal Income Tax Rate Brackets
|
Tax Rate |
Joint/Surviving Spouse |
Single |
Head of Household |
Married Filing Separately |
Estates & Trusts |
|
10% |
$0 – $22,000 |
$0 – $11,000 |
$0 – $15,700 |
$0 – $11,000 |
$0 – $2,900 |
|
12% |
$22,001 – |
$11,001 – |
$15,701 – |
$11,001 – |
- |
|
22% |
$89,451 – |
$44,726 – |
$59,851 – |
$44,726 – |
- |
|
24% |
$190,751 – |
$95,376 – $182,100 |
$95,351 – $182,100 |
$95,376 – |
$2,901 – |
|
32% |
$364,201 – |
$182,101 – $231,250 |
$182,101 – $231,250 |
$182,101 – |
- |
|
35% |
$462,501 – |
$231,251 – $578,125 |
$231,251 – $578,100 |
$231,251 – |
$10,551 – $14,450 |
|
37% |
Over $693,750 |
Over $578,125 |
Over $578,100 |
Over $346,875 |
Over $14,450 |
2024 Federal Income Tax Rate Brackets
|
Tax Rate |
Joint/Surviving Spouse |
Single |
Head of Household |
Married Filing Separately |
Estates & Trusts |
|
10% |
$0 – $23,200 |
$0 – $11,600 |
$0 – $16,550 |
$0 – $11,600 |
$0 – $3,100 |
|
12% |
$23,201 – |
$11,601 – |
$16,551 – 63,100 |
$11,601 – |
- |
|
22% |
$94,301 – |
$47,151 – $100,525 |
$63,101 – $100,500 |
$47,151 – |
- |
|
24% |
$201,051 – |
$100,526 – $191,950 |
$100,501 – $191,950 |
$100,526 – |
$3,101 – $11,150 |
|
32% |
$383,901 – |
$191,951 – $243,725 |
$191,951 – $243,700 |
$191,951 – |
- |
|
35% |
$487,451 – |
$243,726 – $609,350 |
$243,701 – $609,350 |
$243,726 – |
$11,151 – $15,200 |
|
37% |
Over $731,200 |
Over $609,350 |
Over $609,350 |
Over $365,600 |
Over $15,200 |
Timing Income and Deductions: Optimizing Cash In and Write-Offs
Taxpayers should carefully evaluate whether they have the opportunity to minimize their tax bills by strategically adjusting their income and deductions between 2023 and 2024. It is ideal to receive income in the year with a lower marginal tax rate and pay deductible expenses in the year with a higher marginal tax rate. If the marginal tax rate remains the same in both years, consider deferring income from 2023 to 2024 for a one-year tax deferral, and accelerating deductions from 2024 to 2023 to lower the 2023 income tax liability.
Here are some actions to consider that may lead to a reduction or deferral of taxes:
- Delaying closing capital gain transactions until after year-end or structuring 2023 transactions as installment sales so that gain is deferred past 2023 (also see Long Term Capital Gains, below).
- Considering whether to trigger capital losses before the end of 2023 to offset 2023 capital gains.
- Delaying interest or dividend payments from closely held corporations to individual business-owner taxpayers.
- Deferring commission income by closing sales in early 2024 instead of late 2023.
- Accelerating deductions for expenses such as mortgage interest and charitable donations (including donations of appreciated property) into 2023 (subject to AGI limitations).
- Evaluating whether non-business bad debts are worthless by the end of 2023 and should be recognized as a short-term capital loss.
- Shifting investments to municipal bonds or investments that do not pay dividends to reduce taxable income in future years.
On the other hand, taxpayers who will be in a higher tax bracket in 2024 may want to consider potential ways to move taxable income from 2024 into 2023, such that the taxable income is taxed at a lower tax rate. Current year actions to consider that could reduce 2024 taxes include:
- Accelerating capital gains into 2023 or deferring capital losses until 2024.
- Electing out of the installment sale method for 2023 installment sales.
- Deferring deductions such as large charitable contributions to 2024.
Net Investment Income Tax
An additional 3.8% net investment income tax (NIIT) applies to net investment income above certain thresholds. Net investment income does not apply to income derived in the ordinary course of a trade or business in which the taxpayer materially participates. Similarly, gain on the disposition of trade or business assets attributable to an activity in which the taxpayer materially participates is not subject to the NIIT.
In conjunction with other tax planning strategies that are being implemented to reduce income tax or capital gains tax, impacted taxpayers may want to consider deferring net investment income for the year.
Charitable Contributions
Cash contributions made to qualifying charitable organizations, including donor-advised funds, in 2023 and 2024 will be subject to a 60% AGI limitation. The limitations for cash contributions continue to be 30% of AGI for contributions to non-operating private foundations. Tax planning around charitable contributions may include:
- Creating and funding a private foundation, donor-advised fund or charitable remainder trust.
- Donating appreciated property to a qualified charity to avoid long-term capital gains tax.
Estate and Gift Taxes
For gifts made in 2023, the gift tax annual exclusion is $17,000, and for 2024 is $18,000. For 2023, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $12,920,000 per person. For 2024, the unified estate and gift tax exemption and generation-skipping transfer tax exemption is $13,610,000. All outright gifts to a spouse who is a U.S. citizen are free of federal gift tax. However, for 2023 and 2024, only the first $175,000 and $185,000, respectively, of gifts to a non-U.S. citizen spouse is excluded from the total amount of taxable gifts for the year. Tax planning strategies may include:
- Making annual exclusion gifts.
- Making larger gifts to the next generation, either outright or in trust.
- Creating a Spousal Lifetime Access Trust (SLAT) or a Grantor Retained Annuity Trust (GRAT) or selling assets to an Intentionally Defective Grantor Trust (IDGT).
We can help you
By carefully assessing their tax situations for 2023 and 2024, individuals, business owners, and family offices can uncover valuable opportunities to reduce, delay, or expedite their tax obligations. By strategically timing income and deductions, optimizing cash flow, and adjusting expenses, they can effectively lower their tax burden. It is crucial to plan ahead and make the most of these opportunities to efficiently manage cash flow and minimize tax liabilities. It is advisable to seek professional advice and explore our resources to gain further insights into tax planning.
