Can You Postpone Your RMDs?
New rules take effect in 2023
During the onset of the pandemic, Congress waived the rules for participants taking required minimum distributions (RMDs) from qualified retirement plans, like 401(k) plans, and traditional IRAs for one year—2020. But then the RMD rules returned in full force in 2021.
Now new legislation enacted late last year, dubbed SECURE Act 2.0, postpones the required beginning date (RBD) for RMDs of certain senior citizens, What’s more, the new law effectively cuts in half the penalty for failing to take timely RMDs.
Background: Generally, the RBD for taking RMDs from qualified plans and IRAs is April 1 of the year following the year in which you reach a specified age. (Other more complex rules apply to individuals who have inherited retirement accounts.) The amount of the annual RMD is based on IRS life expectancy tables, updated in 2022, and the value of the account on the last day of the previous year.
In other words, your RMDs for the 2023 tax year depend on the balance in your accounts as of December 31, 2022. The RMDs are taxed at ordinary income tax rates currently as high as 37%.
If you do not comply with these rules, the IRS may assess a tax penalty on top of the regular income tax that is due. Previously, the penalty was equal to a staggering 50% of the amount that should have been withdrawn (or the difference between the required amount and any lesser amount actually withdrawn). For example, if you failed to take a $10,000 distribution on time, the penalty was $5,000.
For decades, the age threshold for beginning RMDs from qualified plans and IRAs was 70½. However, the initial SECURE Act increased the threshold to age 72, beginning in 2020. Now SECURE Act 2.0 bumps it up to age 73 for 2023 and thereafter.
Accordingly, if you are turning age 72 in 2023, you do not actually have to start taking RMDs until April 1, 2025 (although you may begin RMDs in 2024 to avoid having to double up in 2025).
Icing on the cake: Under SECURE Act 2.0, the RBD is scheduled to rise again to age 75 in 2033, barring any further legislation by Congress.
In addition, the new law significantly reduces the penalty for failing to take RMDs in a timely fashion. Specifically, it reduces the 50% penalty to 25% of the shortfall, beginning in 2023. Even better, the penalty is cut down to 10% for retirement account owners who fail to take an RMD but correct the error within two years.
Finally, owners of Roth accounts in employer-sponsored retirement plans like 401(k) plans will no longer have to take lifetime RMDs from these accounts, beginning in 2024. The tax law already exempts owners of Roth IRAs from lifetime distributions.
Bottom line: The new law provides more flexibility to retirement-savers. If you have any questions, do not hesitate to contact your professional advisors.
Five Challenges Facing Small Businesses
How to prosper in changing world
Can you remember back when you did your research at the library instead of online and only international spies had cellphones? Changes keep occurring these days at a breakneck speed and small businesses are often hard-pressed to keep up. It is important to adapt to the latest developments and be able to incorporate them into your business planning.
What sort of changes are we talking about? Here are five prime areas worthy of your attention in 2023.
- Legal issues: Laws continue to be enacted and evolve, as interpreted by the courts, so small business owners must fine-tune operations accordingly. In recent years, we have experienced numerous changes on both the national and state levels. For instance, the new federal infrastructure law passed last year includes substantial expenditures relating to public transportation, technological improvements and climate control issues. Among other changes, 27 states have laws affecting minimum wages of workers that take effect in 2023. You can expect state legislatures to continue to keep you on your toes.
- Technology: As alluded to above, technology has changed the way we do business. Do not expect the pace to slow down anytime soon. Savvy businesspeople will aim to keep abreast of technological advancements ranging from new production techniques to software enhancements. Learning how to embrace and accommodate the new technology can give your business a competitive edge while laggards may be left in the dust.
- Marketing: Marketing has changed drastically over recent years. For one thing, there are different approaches available now due to technology, such as the ability to advertise online and the use of websites and social media as marketing tools. Also, small business owners should be attuned to shifts in consumer tastes and preferences, as well as being able to accentuate strengths and minimize the weaknesses of their organization. It may be helpful to “think outside the box.”
- Financing: Generally, it is not as easy for a small business to arrange financing as it was in the not-so-distant past. In the current business environment, you must go the extra mile when presenting your case to available lending authorities or if you are trying to encourage investment from other sources. This means conducting thorough research and analysis on the main targets. Do what you can do stand out in a crowded field. It may help to customize your business plan and documentation to suit each potential funding sources.
- Taxes: One thing that is constant is that the tax law will keep changing. For instance, Congress just enacted SECURE Act 2.0 featuring a slew of provisions affecting retirement-savers and employers providing qualified retirement plans. Meanwhile, the IRS keeps churning out new rulings and regulations and the courts regularly chime in with significant decisions. To complicate matters, Congress continues to debate tax reform proposals, although it will be difficult to reach any consensus with the current political divide.
Fortunately, you do not have to weather the storm alone. With your business advisors at your side, you can meet these challenges head-on and thrive in this ever-changing business world.
Don’t Play Around With Kiddie Tax
Minimize tax damage on returns
Did your young child have investment income in 2022? There is no getting around liability for the “kiddie tax” at this point, although you still may be able to reduce or eliminate the tax for 2023. Saving grace: Due to a recent tax law change—actually a reversion to prior law—the kiddie tax is not as imposing as it was before.
Background: If your dependent child who is under age 19 or a full-time student under age 24 receives “unearned income” above a specified annual threshold, the excess is subject to the kiddie tax. This includes capital gains, interest and dividends from investments, but not wages.
The threshold is indexed annually for inflation. It is $2,300 for 2022 and is increased to $2,500 for 2023.
If the child’s income exceeds the threshold, the excess is taxed at the top tax rate of the child’s parents. For instance, if the parents are in the top 37% bracket, the additional income is taxed at the 37% rate instead of the child’s normal rate. However, a change in the Tax Cuts and Jobs Act (TCJA) that relied on the tax rates for estates and trusts to calculate the kiddie tax has been repealed. Generally, the TCJA provision resulted in a higher kiddie tax.
At least you may be able to elect to report your child’s interest, ordinary dividends, and capital gains distributions on your return. If you make this election, your child will not have to file a tax return. To qualify for this election, you must meet the following requirements:
- Your child was under age 19, or a full-time student under age 24, by the end of the year.
- Your child’s gross income was less than $11,500 for the tax year.
- Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends).
- No estimated tax payments were made for your child for the tax year and no overpayment from the previous tax year (or from any amended return) was applied to the current tax year under your child’s name and Social Security number (SSN).
- No federal income tax was withheld from your child’s income under the backup withholding rules.
- Your child does not file a joint return for the tax year.
- You are the parent qualified to make the election or you file a joint return with your child’s other parent.
- Your child is otherwise required to file a return.
What can you do to address kiddie tax concerns for 2023? Consider the following four ideas.
- Stay under the annual $2,500 threshold. For instance, you might delay gifts of income-producing assets to your child until they are past the kiddie tax age.
- Have your child make investments that do not produce current income.
- Have your child invest in tax-free municipal bonds.
- Hire your child who is a high school or college student to work part-time for your company. Reminder: Wages are not subject to the kiddie tax.
Practical advice: Consult with your professional tax advisors concerning your personal situation.
Electing the Alternate Valuation Date
Key estate tax planning consideration
Financial markets have been up and down so far this year. Due to the volatility, some of your assets, such as various securities, may have dropped in value. If this adversely affects federal estate tax liability for a decedent’s estate, there is a potential solution: An executor may be able to elect to use an “alternate valuation date” for estate tax purposes.
Background: Under current law, most families are protected from federal estate tax through two provisions. (1) The unlimited marital deduction completely shields from tax assets transferred from one spouse to another. (2) Assets passing to non-spouse beneficiaries may be covered by a unified estate and gift tax exclusion of $10 million, indexed for inflation. The figure for 2023 is $12.92 million. (The exemption is scheduled to drop to $5 million, plus inflation indexing, after 2025.)
For estates that are subject to estate tax, the top tax rate is 40%. Thus, if transfers to non-spouse beneficiaries exceed the exemption amount by $1 million, the tax is $400,000.
Normally, assets owned by a decedent are included in the taxable estate based on their value on the date of death. For instance, if a decedent owned stocks valued at $500,000 on the day they pass away, the stocks are included in the estate at a $500,000 value.
However, the tax law provides relief to estates negatively affected by fluctuating market conditions. Instead of using the value of assets on the date of death, the executor may elect the alternate valuation date of six months after the date of death. This could effectively lower the federal estate tax bill.
To qualify for alternate valuation, the following requirements must be met:
- The total value of the gross estate must be lower on the alternate valuation date than it is on the date of death. (Of course, the election generally would not be made otherwise.) If assets are sold after death, the date of the disposition controls.
- The amount of estate tax must be lower using the alternate valuation date than it would be on the date of death.
- Any assets that decline in value due to the passage of time must still be valued as of the date of death.
- The election to use the alternate valuation date must be made within one year of the estate tax filing date. What’s more, the election is irrevocable.
There is, however, one catch: The alternate valuation date must be used for all assets included in the estate. The executor cannot cherry-pick assets that have dropped in value without doing the same for all the others, including any that have appreciated in value. This can be an important consideration if the decedent owned, say, appreciating real estate.
Reminder: The estate tax return is due within nine months of the date of death. So, there is generally only a small window of opportunity for electing the alternate valuation date. Obtain professional guidance in this area.
When You Need More Time to File
Do not despair if you are having trouble getting all your tax return information together in time for the April 18 filing deadline. You may request an automatic six-month filing extension—no questions asked by the IRS. This gives you until October 16, 2023 (October 15 is a Sunday) to file your 2022 return.
Caveat: A filing extension is not an extension to pay tax. You should have a reasonable estimate made of the amount you owe and pay the IRS by April 18.
Facts and Figures
Timely points of particular interest
New Tax Directions—Under the Inflation Reduction Act (IRA) passed last year, electric vehicles (EVs) may qualify for a credit of up to $7,500, beginning in 2023. But the manufacturer’s suggested retail price can’t exceed $55,000 for sedans and $80,000 for vans, SUVs and pickup trucks. Now the IRS is providing more information about claiming the enhanced credit at www.fueleconomy.gov. Contact your professional tax advisors for further guidance.
Business Acumen—People with business acumen learn to react quickly and decisively in various business situations. Yet they are smart enough to ensure flexibility to address unexpected occurrences and other future issues. To strengthen business acumen, you should (1) focus on your thought processes, (2) develop extensive business knowledge and (3) exhibit leadership and management skills. Plus, using a healthy dose of “common sense” will not hurt.