The new year is bringing positive changes for Midlands taxpayers.
From incentives for energy efficiency to provisions aimed at the historic spike in inflation, favorable tax changes may lead to that nest egg snowballing in size – with a little help from your financial adviser friends, of course.
The SECURE Act 2.0
Ross Polking, lead advisor-business development at Foster Group, highlighted legislation introduced last year designed to bring income tax relief for Nebraskans.
“Individual and business income state tax rates will begin dropping progressively over the next few years,” Polking said. “Social Security benefits will no longer be subjected to state income tax as well.”
Additional child care and property tax credits are down the pike. The SECURE Act 2.0, which requires most employers to enroll eligible employees in the company’s retirement plan, brings new changes in 2024. More notably, the required minimum distribution age has increased to 73.
“Across the country, SECURE Act 2.0 included many provisions that will be effective in 2024,” Polking stated. “Individuals and businesses need to check in with their CPA on how these changes impact their situation, and plan accordingly.
Here again, he emphasized maneuvering change with proactive, consultative advisory teams.
“Most every decision individuals and business owners make have some tax ramification associated,” he said.
Pass-Through Entity Tax Law
Specific to business owners, Polking spotlighted the considerable decrease in 2027 in the top corporate income tax rate from 7.5% to 3.99%.
“Retirement plan contribution limits are being increased, which allows for further sheltering of income for employees and owners alike,” he said. “One of the most celebrated tax law changes for business owners comes via the pass-through entity tax (PTET) law.”
The PTET change reportedly allows for “pass-through” entities (businesses taxed as partnerships or subchapter S corporations) to voluntarily elect to pay state income taxes on behalf of their owners.
“This avoids the impact of the SALT (state and local tax) cap by shifting the tax from the business owner to the owner’s business, effectively creating a deductible business expense that is not impacted by the SALT cap,” Polking said.
Brian Klintworth, partner at HBE LLP, noted that PTET is top of mind for many businesses.
“Due to the tax changes from 2017’s Tax Cuts & Jobs Act (TCJA), individuals generally lost the ability to benefit from deducting state income taxes on their personal return. So, this can lead to some significant savings,” Klintworth said.
Both Nebraska and Iowa passed PTET laws this year, he said, and both have a “retroactive component,” with Nebraska from 2018 to 2022 and Iowa for 2022.
“Nebraska also will be lowering the top tax rate between now and 2027, ultimately reducing the top rate from 6.84% in 2022 to 3.99% in 2027,” Klintworth noted. “A possible change that is coming is the sunset of many of the beneficial tax provisions of the TCJA after 2025.”
He listed the following potential changes:
Estate limitations being cut in half
Tax rates going up
Tax brackets getting smaller (so, a taxpayer hits the higher tax rates with lower income)
Elimination of the QBI Deduction (currently, allows for most business income that flows to an individual return to have 20% of the business income not subject to federal tax)
“Not only is this currently scheduled to happen, but uncertainty about what will or will not happen following the 2024 elections means there is a lot of uncertainty about what tax policy will look like in the coming years,” Klintworth summed up.
While PTET does require a bit of planning, he emphasized how it can yield major tax benefits.
“While this will help increase the benefits to many business owners, it does add some filing complexity and cash flow considerations to be thinking about,” he said.
Savings Opportunities
Kimberly Kropp, partner at Moylan Kropp, isolated new tax law changes such as the lowest rate of 10% will apply to individuals with taxable income up to $11,600 (and joint filers up to $23,200).
“The top rate of 37% will apply to individuals making above $609,350 and married couples filing jointly earning $731,200 or more,” Kropp said. “The standard deduction will increase by $750 for single filers and $1,500 for married.”
The alternative minimum tax (AMT) exemption, too, will be higher.
“The earned income tax credit has been boosted,” she added. “Monthly limitation for the qualified transportation fringe benefit [is] increasing by $15.”
Changes spanned allowable flexible spending account (FSA) contributions, increased foreign earned exclusion, and how beneficiaries can exclude more of a “decedent’s” estate – from $12.92 million in 2023 to $13.61 million. Likewise, the annual exclusion for gifts is increasing from $17,000 to $18,000. And, lastly, she noted how the adoption credit is ratcheting up in 2024 to $16,800.
“The implications are positive for the most part, due to the fact these changes have to do with deductions, exemptions, earned income tax credits, rise in allowable FSA contributions, rise in gifting exclusions and adoption credits,” Kropp summarized.
On the business front, she isolated the SALT deductions and in-state pass-through entity change, noting how this can offer significant benefits to owners. But, she cautioned: “complex determinations [depend] on a variety of factors that involve both federal income tax rules as well as state tax rules.”
Energy Credits and More
Passed in 2023 as the most substantive tax package impacting individuals, the Inflation Reduction Act offers significant tax credits for clean energy investments.
For individuals, Joe Donovan, shareholder at Lutz, noted four items that he said “reset” with inflation. They include the following:
Standard deduction increases (married couple, filing jointly) — $25,900 to $27,700 to $29,200 for 2022, 2023, and 2024, respectively
IRA contribution limit increases — $6,000, $6,500, $7,000 between 2022 and 2024
401(k) contribution limits increase — From $20,500 in 2022 to $22,500 and $23,000 in 2023 and 2024, respectively
HSA contribution limits increase — Starting at $7,300 in 2022, to $7,750 and $8,300 in 2023 and 2024
“The energy credits can be for individuals making energy-efficient improvements to their homes — like solar, geothermal systems, energy-efficient appliances, vehicles … These credits are very nuanced and complex,” Donovan said. “You should consult a tax adviser to see if you qualify for energy credits under the Inflation Reduction Act.”
Importantly, he urged being aware of the potential benefit of energy-efficient credits that the government is incentivizing.
“[Individuals] should also be aware of the increased contribution limits to tax-advantaged accounts and be sure to take advantage of them where applicable,” he said.
Business owners, too, he indicated should be aware of the decrease in bonus depreciation on capital expenditures – from 100% of the asset’s cost in 2022 to 80% in 2023.
“Another change that came into effect in tax year 2022, but is a large change that is in effect in 2023, is the requirement that businesses capitalize and amortize their research and development expenses, rather than getting to deduct them immediately,” Donovan stated. “Finally, more businesses are being impacted by the business interest limitation due to interest expense being higher in 2023, leading to greater limitations.”
Businesses are also being impacted potentially by the energy-efficient credits for individuals; for example, he referred to credits for building energy-efficient structures or housing, both single and multi-family, as well as energy-efficient investments in vehicles, and solar, geothermal, and wind power updates to one’s operations.
“Tax laws related to businesses are very nuanced,” he stressed. “Consulting with your tax adviser can help you plan for tax law changes and ensure your business is taking advantage of applicable benefits.”
Strategy Above All
Amid all the change, there remains some time-tested wisdom.
“Meet with your advisory team and strategically plan for the year ahead,” Polking said. “Better yet, have a pre-meeting in the fourth quarter of the year prior.”
Kropp, too, emphasized year-end and beginning-of-year meetings with accountants to understand tax law changes that have occurred or are in the works and to address “if all goals were met and what to look ahead to for improvement in the next year.”
Get ahead by creating a plan, Donovan stressed.
“Once you have a plan, it should be reviewed quarterly with your advisor so you can adjust as you go,” he stated. “The best way to deal with tax law changes and taxes, in general, is to give yourself and your business adequate time to plan and react instead of trying to do a full year’s worth of planning in the last month of the year.”
Klintworth said now is a great time to close the books, get data in order, prepare for tax season and for ’24 and beyond.
“The more on top of your information you can stay throughout the year, the better off you will end up,” he said. “It’s much easier to start on track than to try and catch up later. Also, if you’ve been looking at making changes – maybe a new bank, accounting software, or other items – the start of the year can be a great time to make a switch.”
