Some highlights

Standard deduction. What does an increased standard deduction mean for you? A larger standard deduction will shelter more income from federal income tax next year. For 2023, the standard deduction will increase to $13,850 for single taxpayers, $27,700 for married couples filing jointly and $20,800 for heads of household. This is up from the 2022 amounts of $12,950 for single taxpayers, $25,900 for married couples filing jointly and $19,400 for heads of household.

The highest tax rate. For 2023, the highest tax rate of 37% will affect single taxpayers and heads of households with income exceeding $578,125 ($693,750 for married taxpayers filing jointly). This is up from 2022 when the 37% rate affects single taxpayers and heads of households with income exceeding $539,900 ($647,850 for married couples filing jointly).

Retirement plans. Many retirement plan limits will increase for 2023. That means you’ll have an opportunity to save more for retirement if you have one of these plans and you contribute the maximum amount allowed. For example, in 2023, individuals will be able to contribute up to $22,500 to their 401(k) plans, 403(b) plans and most 457 plans. This is up from $20,500 in 2022. The catch-up contribution limit for employees age 50 and over who participate in these plans will also rise in 2023 to $7,500. This is up from $6,500 in 2022.

For those with IRA accounts, the limit on annual contributions will rise for 2023 to $6,500 (from $6,000). The IRA catch-up contribution for those age 50 and up remains at $1,000 because it isn’t adjusted for inflation.

Flexible spending accounts (FSAs). These accounts allow owners to pay for qualified medical costs with pre-tax dollars. If you participate in an employer-sponsored health Flexible Spending Account (FSA), you can contribute more in 2023. The annual contribution amount will rise to $3,050 (up from $2,850 in 2022). FSA funds must be used by year end unless an employer elects to allow a two-and-one-half-month carryover grace period. For 2023, the amount that can be carried over to the following year will rise to $610 (up from $570 for 2022).

Taxable gifts. Each year, you can make annual gifts up to the federal gift tax exclusion amount. Annual gifts help reduce the taxable value of your estate without reducing your unified federal estate and gift tax exemption. For 2023, the first $17,000 of gifts to as many recipients as you would like (other than gifts of future interests) aren’t included in the total amount of taxable gifts. (This is up from $16,000 in 2022.)

Thinking ahead

While it will be quite a while before you have to file your 2023 tax return, it won’t be long until the IRS begins accepting tax returns for 2022. When it comes to taxes, it’s nice to know what’s ahead so you can take advantage of all the tax breaks to which you are entitled.

Also, keep in mind that, under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopted the C-CPI-U on a permanent basis.

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket increases by $75 to $150, depending on filing status, but the top of the 35% bracket increases by $3,125 to $6,250, again depending on filing status.
2021 ordinary-income tax brackets.

The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2021, the standard deduction is $25,100 (married couples filing jointly), $18,800 (heads of households), and $12,550 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help taxpayers who typically itemize deductions.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. For 2021, the threshold for the 28% bracket increased by $2,000 for all filing statuses except married filing separately, which increased by half that amount.

Education and child-related breaks. The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts for 2021 are $73,600 for singles and heads of households and $114,600 for joint filers, increasing by $700 and $1,200, respectively, over 2020 amounts. The inflation-adjusted phaseout ranges for 2021 are $523,600–$818,000 (singles and heads of households) and $1,047,200–$1,505,600 (joint filers). Amounts for separate filers are half of those for joint filers.

The maximum benefits of various education and child-related breaks generally remain the same for 2021. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2021, depending on the break. For example:

The American Opportunity credit. The phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2021: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning credit. The phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2021. They’re $119,000–$139,000 for joint filers and $59,000–$69,000 for other filers — up $1,000 for joint filers but the same as 2020 for others.

The adoption credit. The phaseout ranges for eligible taxpayers adopting a child will also increase for 2021 — by $2,140 to $216,660–$256,660 for joint, head-of-household and single filers. The maximum credit increases by $140, to $14,440 for 2021.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2021, the amount is $11.7 million (up from $11.58 million for 2020).

The annual gift tax exclusion remains at $15,000 for 2021. It’s adjusted only in $1,000 increments, so it typically increases only every few years. (It increased to $15,000 in 2018.)

Retirement plans

Not all of the retirement-plan-related limits increase for 2021. Thus, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2021:

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
  • For a spouse who participates, the 2021 phaseout range limits increase by $1,000, to $105,000–$125,000.
  • For a spouse who doesn’t participate, the 2021 phaseout range limits increase by $2,000, to $198,000–$208,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2021 phaseout range limits increase by $1,000, to $66,000–$76,000.

Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2021 phaseout range limits increase by $2,000, to $198,000–$208,000.
• For single and head-of-household taxpayers, the 2021 phaseout range limits increase by $1,000, to $125,000–$140,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Crunching the numbers

With the 2021 cost-of-living adjustment amounts inching slightly higher than 2020 amounts, it’s important to understand how they might affect your tax and financial situation. We’d be happy to help crunch the numbers and explain the best tax-saving strategies to implement based on the 2021 numbers.

On September 17, the Financial Accounting Standards Board (FASB) issued an accounting rule that will provide more detailed information about noncash contributions charities and other not-for-profit organizations receive known as “gifts in kind.” Here are the details.

Need for change

Gifts in kind can play an important role in ensuring a charity functions effectively. They may include various goods, services and time. Examples of contributed nonfinancial assets include:

• Fixed assets, such as land, buildings and equipment,
• The use of fixed assets or utilities,
• Materials and supplies, such as food, clothing or pharmaceuticals,
• Intangible assets, and
• Recognized contributed services.

Increased scrutiny by state charity officials and legislators over how charities use and report gifts in kind prompted the FASB to beef up the disclosure requirements. Specifically, some state legislators have been concerned about the potential for charities to overvalue gifts in kind and use the figures to prop up financial information to appear more efficient than they really are. Other worries include the potential for a nonprofit to hide wasteful use of its resources.

Enhanced transparency

Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, aims to give donors better information without causing nonprofits too much cost to provide the information.

The updated standard will provide more prominent presentation of gifts in kind by requiring nonprofits to show contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets. It also calls for enhanced disclosures about the valuation of those contributions and their use in programs and other activities.

Specifically, nonprofits will be required to split out the amount of contributed nonfinancial assets it receives by category and in footnotes to financial statements. For each category, the nonprofit will be required to disclose the following:

• Qualitative information about whether contributed nonfinancial assets were either monetized or used during the reporting period and, if used, a description of the programs or other activities in which those assets were used,
• The nonprofit’s policy (if any) for monetizing rather than using contributed nonfinancial assets,
• A description of any associated donor restrictions,
• A description of the valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition, and
• The principal market (or most advantageous market) used to arrive at a fair value measurement if it is a market in which the recipient nonprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial asset.

The new rule won’t change the recognition and measurement requirements for those assets, however.

Coming soon

ASU 2020-07 takes effect for annual periods after June 15, 2021, and interim periods within fiscal years after June 15, 2022. Retrospective application is required, and early application is permitted. Contact us for more information.

Who must file?

Generally, you must file a gift tax return for 2019 if, during the tax year, you made gifts:

• That exceeded the $15,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
• That you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion,
• That exceeded the $155,000 annual exclusion for gifts to a noncitizen spouse,
  To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2019,
• Of future interests — such as remainder interests in a trust — regardless of the amount, or
• Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent that an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.4 million for 2019). As you can see, some transfers require a return even if you don’t owe tax.

Who might want to file?

No gift tax return is required if your gifts for 2019 consisted solely of gifts that are tax-free because they qualify as:

• Annual exclusion gifts,
• Present interest gifts to a U.S. citizen spouse,
• Educational or medical expenses paid directly to a school or health care provider, or
• Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, you should consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

The IRS recently issued its 2020 cost-of-living adjustments. With inflation remaining largely in check, many amounts increased slightly, and some stayed at 2019 levels. As you implement 2019 year-end tax planning strategies, be sure to take these 2020 adjustments into account in your planning.

The Tax Cuts and Jobs Act (TCJA) suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation through 2025. For 2020, the standard deduction is $24,800 (married couples filing jointly), $18,650 (heads of households), and $12,400 (singles and married couples filing separately). After 2025, standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But it might not help a lot of taxpayers who typically itemize deductions.

Education and child-related breaks

The maximum benefits of various education- and child-related breaks generally remain the same for 2020. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges generally remain the same or increase modestly for 2020, depending on the break. For example:

The American Opportunity credit. The MAGI phaseout ranges for this education credit (maximum $2,500 per eligible student) remain the same for 2020: $160,000–$180,000 for joint filers and $80,000–$90,000 for other filers.

The Lifetime Learning credit. The MAGI phaseout ranges for this education credit (maximum $2,000 per tax return) increase for 2020. They’re $118,000–$138,000 for joint filers and $59,000–$69,000 for other filers — up $2,000 for joint filers and $1,000 for others.

The adoption credit. The MAGI phaseout ranges for eligible taxpayers adopting a child will also increase for 2020 — by $3,360 to $214,520–$254,520 for joint, head-of-household and single filers. The maximum credit increases by $220, to $14,300 for 2020.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education- and child-related breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. For 2020, the amount is $11.58 million (up from $11.40 million for 2019).

The annual gift tax exclusion remains at $15,000 for 2020. It’s adjusted only in $1,000 increments, so it typically increases only every few years. (It increased to $15,000 in 2018.)

Retirement plans

Not all of the retirement-plan-related limits increase for 2020. Thus, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2020:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
  • For a spouse who participates, the 2020 phaseout range limits increase by $1,000, to $104,000–$124,000.
  • For a spouse who doesn’t participate, the 2020 phaseout range limits increase by $3,000, to $196,000–$206,000.
  • For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2020 phaseout range limits increase by $1,000, to $65,000–$75,000.

Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $6,000 contribution limit (plus $1,000 catch-up if applicable and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may be beneficial if your MAGI is also too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2019 phaseout range limits increase by $3,000, to $196,000–$206,000.
• For single and head-of-household taxpayers, the 2019 phaseout range limits increase by $2,000, to $124,000–$139,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

Crunching the numbers

With the 2020 cost-of-living adjustment amounts inching slightly higher than 2019 amounts, it’s important to understand how they might affect your tax and financial situation. We’d be happy to help crunch the numbers and explain the best tax-saving strategies to implement based on the 2020 numbers.

The exclusion covers gifts that you make to each person each year. Therefore, if you have three children, you can transfer a total of $45,000 to them this year (and next year) free of federal gift taxes. If the only gifts made during the year are excluded in this way, there’s no need to file a federal gift tax return. If annual gifts exceed $15,000, the exclusion covers the first $15,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: this discussion isn’t relevant to gifts made from one spouse to the other spouse, because these gifts are gift tax-free under separate marital deduction rules.

Gifts by married taxpayers

If you’re married, gifts to individuals made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given to an individual by only one of you. By “gift-splitting,” up to $30,000 a year can be transferred to each person by a married couple, because two annual exclusions are available. For example, if you’re married with three children, you and your spouse can transfer a total of $90,000 each year to your children ($30,000 × 3). If your children are married, you can transfer $180,000 to your children and their spouses ($30,000 × 6).

If gift-splitting is involved, both spouses must consent to it. We can assist you with preparing a gift tax return (or returns) to indicate consent.

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and that are therefore taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $11,400,000 (for 2019). However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Giving gifts of appreciated assets

Let’s say you own stocks and other marketable securities (outside of your retirement accounts) that have skyrocketed in value since they were acquired. A 15% or 20% tax rate generally applies to long-term capital gains. But there’s a 0% long-term capital gains rate for those in lower tax brackets. Even if your income is high, your family members in lower tax brackets may be able to benefit from the 0% long-term capital gains rate. Giving them appreciated stock instead of cash might allow you to eliminate federal tax liability on the appreciation, or at least significantly reduce it. The recipients can sell the assets at no or a low federal tax cost. Before acting, make sure the recipients won’t be subject to the “kiddie tax,” and consider any gift and generation-skipping transfer (GST) tax consequences.

Plan ahead

Annual gifts are only one way to transfer wealth to your loved ones. There may be other effective tax and estate planning tools. Contact us before year end to discuss your options.