How to help clients start a travel fund
We’ll discuss the ways you can help your clients financially plan for travel, like how to save for and book a cost-effective trip.
Tax season has begun, and it’s not too early to think about planning for the 2023 tax year. Reliable strategies have usually included reducing and deferring income, shifting income, and increasing deductions. While clients are thinking about 2022’s taxes, it’s a good time to discuss income, estate, and business planning opportunities for 2023.
Individuals may want to consider several options to reduce or delay their 2023 taxable income.
Clients may consider putting off asset sales or delaying receipt of other income until next year to reduce 2023 taxable income. If a client expects to be in a lower income tax bracket in the future, the deferral could reduce the total tax paid.
It can be worthwhile to regularly examine your client’s asset mix as part of your planning. If they have appreciated investments they’re planning to sell, determine whether they have other assets that carry losses, which they could sell this year to offset the gains. Also consider the capital gains rates brackets. A joint filer reaches the top capital gains rate at an adjusted gross income (“AGI”) of $553,851, so consider limiting investment sales to stay below the top bracket. Don’t forget about the net investment income tax (NIIT), which is an additional 3.8% tax that applies to certain investment income earned at an adjusted gross income (AGI) of $250,000 or more for joint filers. You might encourage clients to spread out investment sales from year to year to minimize the capital gains rate and NIIT.
Because the 2022 and 2023 standard deductions are relatively high ($27,700 in 2023 and $25,900 in 2022 for married couples filing jointly), it may not be worthwhile for many taxpayers to itemize deductions. One strategy may be to accumulate deductions that a client would normally take over 2 years into a single year. For example, they could make most of their charitable contributions and medical expenditures in a year they plan to itemize.
The maximum allowable 401(k) contribution for 2023 is $22,500, with a $7,500 additional contribution, if the plan allows, for taxpayers who are 50 and over. These contributions are made with pretax money, lowering the client’s overall tax bill for the year. Even if the client can’t contribute the maximum amounts, they may want to try contributing enough to take full advantage of any employer match. They could also consider contributions to an individual retirement account (IRA) and a health savings account (HSA), too.
Clients who are age 73 or over must take required minimum distributions (RMDs) from their qualified plans and IRAs. If you have a client who is 70½ or older and would like to donate more to charity, remember that up to $100,000 can be distributed from their IRA to a charity, and it can be used to satisfy their RMD. This qualified charitable distribution (QCD) must be made directly from their IRA to the charity to avoid inclusion in income, and it must be made to a qualified public charity.
For those who are eligible, a Roth conversion could make sense. It could be beneficial to convert some or all a traditional IRA account to a Roth IRA if the client expects to be in a lower income tax bracket for 2023 than in future years. Keep in mind that this transaction will result in taxable income this year, but future income from the Roth IRA will be tax free, assuming certain distribution rules are followed.
There are several steps that business owners may want to take in 2022 to minimize taxes.
Like individuals, businesses holding investments and other capital assets should consider other income, gains, and losses when determining when to sell capital assets. Currently, there is only one federal corporate income tax rate, so C corporations don’t run the risk of hitting a higher bracket because of a capital asset sale. If the business is a pass-through entity, like an S corporation or a partnership, gains and losses will flow through to the owners’ individual returns, so close attention should be paid to the individual owners’ other income when determining whether a pass-through company should sell investments this year.
Business owners who plan to purchase new equipment in 2023 should know they may be able to deduct 80% of the cost as first-year bonus depreciation for eligible equipment and machinery. Additionally, businesses with AGI of $2,800,000 or below can deduct up to $1,160,000 for qualifying Section 179 property placed in service in 2023.
If the business has a nonqualified deferred compensation plan for key employees, it may make sense to informally fund that plan in 2023 to ensure the company has the cash flow to meet the future obligation. Life insurance or mutual funds may be suitable investments to informally fund the plan.
Considering current law and possible changes, estate planning should be flexible and ultimately accomplish your clients’ goals regardless of whether estate tax laws change.
Even if a client believes they would not be subject to estate or gift tax under current law, you may want to re-examine the value of their assets to determine whether they exceed a lower exemption amount. In 2026, the current larger exemption will be reduced from $12,920,000 in 2023 to about $6 million per person ($5 million per person adjusted for inflation). With stock market gains and property value appreciation, a client could end up with a taxable estate in the next few years. Also, many states have much lower estate tax exemptions than the federal exemption, so if your client lives in a state with an estate or inheritance tax, it could be worthwhile to plan for it.
Ultra-high net worth families who can afford to make large gifts may consider using their entire exemption for gifts in 2023. While gifts up to the $12,920,000 limit should not be brought back into their estate if the exemption is reduced in the future, any exemption amount between today’s exemption and a future, lower exemption could be lost if not used.
Using an irrevocable life insurance trust (ILIT) to provide an income tax-free death benefit outside of the taxable estate is a common estate planning technique. Even if premiums are due over several years in the future, a client could make a large gift to an ILIT today to provide a reserve account that the trustee may use to pay upcoming premiums without additional gifts.
It could also be advantageous to make current gifts to other types of trusts that are part of a client’s overall legacy plan. Funding certain types of trusts may be more attractive as interest rates rise. For example, the charitable deduction for contributions to a charitable remainder trust increases when the interest rate is higher.
If a client is a trustee or beneficiary of a current trust, such as a credit shelter trust of a deceased loved one, keep income taxes in mind. In 2023, trust income of $14,451 or over is taxed at the highest tax rate of 37%. Nongrantor trusts get a tax deduction for income distributed to beneficiaries, so income can be managed by optimizing the amount of income that is retained in the trust and that which is distributed to beneficiaries.
While it’s still a few years off, several provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) are scheduled to revert to prior law at the end of 2025. A few have already been mentioned. Some of the significant provisions of the TCJA expiring in 2025 include:
Regardless of uncertainty about tax law changes, there are a multitude of tried-and-true tax planning strategies that work in any environment. You and your client’s tax advisor can work together to come up with an effective overall plan that addresses taxes and nontax goals.
This information is general in nature and is not intended to be tax, legal or other professional advice. Federal income tax laws are complex and subject to change. The information presented here is based on current interpretations of the law and is not guaranteed.
Nationwide and its representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.