With year-end approaching, it is time to start thinking about moves that may help lower your tax bill for this year and next. This year’s planning is more challenging than usual due to recent changes made by the Inflation Reduction Act and the Secure 2.0 Act. Changes impact 2023, 2024 and beyond. The standard year-end approach of deferring income and accelerating deductions to minimize taxes will continue to produce the best results for most taxpayers. We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end.
• Depreciation rules for businesses. Businesses should consider purchasing assets and placing them in service prior to year-end. The Section 179 limit has been raised to $1,160,000. There have been reductions in the other accelerated depreciation method called ‘Bonus’ first year depreciation. Bonus depreciation has been reduced from 100% to 80%, is scheduled to be reduced to 60% in 2024, and phased out by the end 2026.
• Arizona Tax Credits. Contributions to charities that qualify for the various Arizona (“AZ”) Tax Credits (listed below) generate a dollar-for-dollar state tax credit. While these no longer qualify for the federal charitable deduction, taxpayers who itemize deductions and whose state and local taxes paid are less than $10,000 can still get the extra benefit of a federal itemized deduction in addition to the state tax credit. Either way these are still valuable tax planning tools.
You can contribute to one or more of the following:
The public school tax credit for donations to qualifying public schools allows a maximum credit of $200 ($400 if married filing jointly (“MFJ”)).
The private school tax credit has two parts. The basic part allows a maximum credit of $655 ($1,308 if MFJ). Additionally, a ‘switcher’ credit of $652 ($1,301 if MFJ) is also allowed, bringing the combined total to $1,307 ($2,609 if MFJ). You can make both parts of your contribution to the same private certified school tuition organization.
The Charitable tax credit for donations to charities that assist the Working Poor allows a maximum credit of $421 ($841 if MFJ).
The Foster Care tax credit for donations to qualifying foster care organizations allows a maximum credit of $526 ($1,051 if MFJ).
Lists of qualifying organizations appear on the ADOR website https://azdor.gov/tax-credits.
For the school, charitable and foster care credits, qualifying contributions made between January 1, 2024, and April 15, 2024, can be used as a tax credit on either your 2023 or 2024 AZ income tax return.
The AZ Military Family Relief Fund tax credit. This credit of $200 ($400 if MFJ) is administered by the AZ Dept of Veterans’ Services. Annual donations to the fund are capped at $1 million. At this time online donations are still being accepted at https://dvs.az.gov/donate/military-family-relief-fund-2023.
• Contributions to 529 College Savings Plans. Arizona allows a deduction for 529 Plan contributions of $2,000 per beneficiary ($4,000 if MFJ). For example, a married couple contributing $4,000 to each of their five grandchildren’s 529 accounts can claim a $20,000 deduction on their AZ tax return.
• Tax-free rollovers from 529 Plans to Roth IRAs permitted. Beginning in 2024, new law allows beneficiaries of 529 college savings accounts to make direct trustee-to-trustee rollovers from a 529 account in their name to their Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete. Congress, of course, never makes things easy, and this is no different. Some of the nuances are: lifetime aggregate rollovers cannot exceed $35,000; rollovers are subject to the Roth IRA annual contribution limits, which includes having earned income at least equal to the amount of the rollover, but the limit based on the adjusted gross income is waived; the 529 account must have been open for more than 15 years; and the rollover cannot exceed the aggregate amount contributed to the account (and attributable earnings) before the five-year period ending on the date of the rollover.
• Required Minimum Distributions (RMDs) from IRAs. Congress seems to change the RMD beginning age every time a new tax law passes, which causes a lot of confusion for taxpayers, tax professionals and financial advisors. Under the new law, the required beginning date increases from 72 to 73 for individuals who attain age 72 after December 31, 2022.
• Energy Credits. The new law adds some new energy tax credits & modifies some preexisting rules. The rules are complex and the details are beyond the scope of this newsletter. Here is a brief summary:
Energy Efficient Home Improvement & Residential Clean Energy Credits:
1. Replaces the lifetime credit cap of $500 with a more generous annual credit cap of $1,200 for various energy efficient improvements to your 1st or 2nd home. Examples are windows, skylights, doors, air sealing materials, etc. Also, energy audits on primary residences qualify for the credit.
2. Separate $2,000 credit applies to heat pumps, heat pump water heaters, biomass stoves & boilers.
3. Solar electric, solar hot water, and battery storage technology may be eligible for a 30% credit.
Clean Energy Vehicle Credit
1. $7,500 tax credit is available on qualifying new vehicles.
2. Income Test: The credit is only available to taxpayers with current year or prior year modified adjusted gross income less than $150k (single), $300k (MFJ) or $225k (head of household).
3. Cost Test: The credit is only available for SUVs, vans & pickup trucks if the MSRP is less than $80k. For other vehicles MSRP must be less than $55k.
4. Beginning in 2024 buyers may transfer their credit to a qualified dealer for a reduction in purchase price or rebate. However, this must be reconciled on your tax return and if you fail the income test the credit must be repaid with your tax return.
5. Used vehicles that qualify are also eligible for a credit equal to the lesser of 30% of the purchase price or $4k. Among other qualifications, the used vehicle must be purchased from a dealer, cost less than $25k, and the income test thresholds are one-half of the new vehicle income limits.
The tax planning strategies mentioned in this letter are general suggestions that may not apply to every taxpayer. Please feel free to contact us to discuss your specific tax situation. By doing year-end tax planning now, we can take a proactive approach to reducing your taxes, rather than just being reactive.