Once the 2023 tax year is over and the numbers are generally set in stone, you can itemize deductions on your federal income tax return if your total allowable itemized write-offs for the year exceeds your standard deduction allowance for the year. Otherwise, for 2023, you will claim the standard deduction, which is relatively high under current tax law.

Since we haven’t yet reached year end, you still have some time to take actions that could increase your total itemized write-offs to the point where they exceed your 2023 standard deduction allowance. However, not everyone has the flexibility to do so. 

Standard Deduction Amounts for 2023

For 2023, the basic inflation-adjusted standard deduction allowances are:

• $13,850 if you’re single or married and filing separately,
• $27,700 if you’re married and filing jointly, and
• $20,800 if you’re a head of household.

Taxpayers who are age 65 or older or blind are entitled to additional standard deduction allowances. For 2023, the additional amounts are:

• $1,500 for a married taxpayer, and
• $1,850 for a single filer or head of household.

Standard Deduction Amounts for 2024

Next year, the basic standard deduction allowances will increase to:

• $14,600 if you’re single or married and filing separately,
• $29,200 if you’re married and filing jointly, and
• $21,900 if you’re a head of household.

For 2024, the additional standard deduction allowances for those who are 65 or older at the end of the tax year or blind are:

• $1,550 for a married taxpayer, and
• $1,950 for a single filer or head of household.

Last-Minute Tips to Increase Itemizable Expenses

If your total itemizable deductions for this year will be close to your standard deduction allowance, you may be able to make enough additional expenditures for itemized deduction items before year end to surpass your standard deduction. Those extra expenditures will allow you to itemize and reduce your 2023 federal income tax bill.

Next year, you may or may not be able to do the same thing. If you can’t, you can claim the 2024 standard deduction. It will increase roughly 5.4% in 2024 thanks to the annual inflation adjustment.   

The easiest itemizable expense to prepay is included in house payments that are due on January 1, 2024, for your primary residence or vacation home. Making that payment before year end will allow you to deduct home mortgage interest expense for 13 months (instead of 12 months) for 2023. Although the Tax Cuts and Jobs Act put stricter limits on home mortgage interest deductions, you may be unaffected. But check with your tax advisor to be sure.

Important: If you took advantage of this strategy in 2022, you’ll have do it again this year to have 12 months’ worth of mortgage interest expense this year. But that only matters if you itemize this year. 

Other options to consider include:

• Making additional donations before year end to IRS-approved charities,
• Prepaying state and local income and property taxes that are due early next year, and
• Scheduling some elective medical procedures, including dental work and eye appointments, before December 31, 2023, if you’re eligible for a medical expense deduction.

There are a couple limitations to watch out for, however. For example, current tax law limits the maximum amount you can deduct for all state and local taxes combined to $10,000 per year ($5,000 if you’re married and filing separately). In addition, you can deduct medical expenses only to the extent they exceed 7.5% of your adjusted gross income for the year.

Limited-Use Strategy

Not everyone will have the flexibility to take actions that will cause their total itemizable write-offs to exceed their standard deduction allowance. So, itemizing isn’t always a choice for a particular tax year. But when it’s a choice, it usually makes sense to itemize.

If your itemizable write-offs are typically close to your standard deduction allowance, the tax-smart strategy in your situation is to itemize in one year and then claim the relatively generous standard deduction the following year. Over the two-year period, your taxes will be lower.

Looking Ahead Today’s high standard deduction amounts are scheduled to expire after 2025. Without future legislation, the amounts will drop significantly in 2026. If that happens, you’ll have to reassess your tax situation. In the meantime, discuss any questions about itemizing deductions with your tax advisor.

Municipal bonds (often referred to as “munis”) can be attractive to income-seeking investors because they provide an income stream exempt from federal and, in certain cases, state and local income taxes. Like other fixed-income investments, munis involve risk. But as part of a broadly diversified portfolio, they can offer you an effective way to increase your after-tax earnings.

State and Local Projects

Munis are debt securities issued by state and local governments — or entities on their behalf — to generate funds for various public needs. Examples include toll roads, schools and hospitals, as well as general use bonds of cities, counties and states.

For investors, the main selling point of m3.8nis is that their income is exempt from federal income taxes. What’s more, if you live in the state in which the bonds are issued — or if you buy bonds issued by U.S. territories, such as Puerto Rico or Guam — the securities’ interest payments may also be exempt from state and local taxes. One federal exception is that not all municipal bond income is exempt from the alternative minimum tax.

Benefits For Investors

Munis may be appropriate for investors looking to manage their tax exposure and traditionally have been of greatest use for upper-income taxpayers. In general, the higher your combined federal, state and local income tax rate, the more valuable munis become.

Consider that the top federal income tax rate is 37% (as of 2023) and high-net-worth individuals face an additional 3.8% Medicare tax on net investment income. The bite is even greater for residents of high-tax states. In California, for example, the top state tax bracket is currently 13.3%, meaning that, for every dollar earned over $1 million, you’d potentially face a combined income tax rate of more than 54%.

Consider the Risks

As with any fixed-income product, munis are vulnerable to rising interest rates. They also face credit risk — the threat that a bond issuer won’t be able to repay its debts. In fact, even the idea of a default can cause bond prices to drop — for example, when a major credit agency downgrades a city’s bonds because the city (not the specific project) is having financial problems.

Although credit risk is a real challenge — especially when dealing with lower-rated municipal bonds — it’s worth noting that munis have historically defaulted much less than comparable corporate bonds. This doesn’t mean that corporate bonds are a worse investment. Many corporate bonds offer higher yields as compensation for the increased default potential and higher taxes. But it does suggest that the credit challenges faced by a few states and municipalities in the last decade or so aren’t necessarily representative of the risks involved with tax-exempt debt.

Individual Bonds Vs. Mutual Funds Even though you can buy individual bonds directly from municipal issuers, most investors find it more efficient to gain exposure to this asset class through mutual funds. The latter provide a few significant advantages: They’re more liquid and generally provide better diversification than most investors can achieve on their own buying individual bonds.

WASHINGTON —The Internal Revenue Service today reminded individual retirement arrangement (IRA) owners age 70½ or over that they can transfer up to $100,000 to charity tax-free each year.

These transfers, known as qualified charitable distributions or QCDs, offer eligible older Americans a great way to easily give to charity before the end of the year. And, for those who are at least 73 years old, QCDs count toward the IRA owner’s required minimum distribution (RMD) for the year.

How to set up a QCD

Any IRA owner who wishes to make a QCD for 2023 should contact their IRA trustee soon so the trustee will have time to complete the transaction before the end of the year.

Normally, distributions from a traditional IRA are taxable when received. With a QCD, however, these distributions become tax-free as long as they’re paid directly from the IRA to an eligible charitable organization.

QCDs must be made directly by the trustee of the IRA to the charity. An IRA distribution, such as an electronic payment made directly to the IRA owner, does not count as a QCD. Likewise, a check made payable to the IRA owner is not a QCD.

Each year, an IRA owner age 70½ or over when the distribution is made can exclude from gross income up to $100,000 of these QCDs. For a married couple, if both spouses are age 70½ or over when the distributions are made and both have IRAs, each spouse can exclude up to $100,000 for a total of up to $200,000 per year.

The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable, and no deduction is available for the transfer.

Report correctly

A 2023 QCD must be reported on the 2023 federal income tax return, normally filed during the 2024 tax filing season.

In early 2024, the IRA owner will receive Form 1099-R from their IRA trustee that shows any IRA distributions made during calendar year 2023, including both regular distributions and QCDs. The total distribution is shown in Box 1 on that form. There is no special code for a QCD.

Like other IRA distributions, QCDs are reported on Line 4 of Form 1040 or Form 1040-SR. If part or all of an IRA distribution is a QCD, enter the total amount of the IRA distribution on Line 4a. This is the amount shown in Box 1 on Form 1099-R.

Then, if the full amount of the distribution is a QCD, enter 0 on Line 4b. If only part of it is a QCD, the remaining taxable portion is normally entered on Line 4b.

Either way, be sure to enter “QCD” next to Line 4b. Further details will be in the instructions to the 2023 Form 1040.

Get a receipt

QCDs are not deductible as charitable contributions on Schedule A. But, as with deductible contributions, the donor must get a written acknowledgement of their contribution from the charitable organization before filing their return.

In general, the acknowledgement must state the date and amount of the contribution and indicate whether the donor received anything of value in return. For details, see the Acknowledgement section in Publication 526, Charitable Contributions.

For more information about IRA distributions and QCDs, see Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

The holidays are just around the corner, and now is the time for employers to start thinking about treating their employees with holidays parties or gifts. Such gestures are always a nice idea. Plus in a tight labor market, they can be a smart way to show appreciation and boost retention. But you need to know the tax rules so your well-intentioned efforts don’t backfire on you and your employees.

Holiday Parties

The good news is that holiday parties for employees generally are fully deductible for employers, with no tax implications for employees. Remember, though, that tax-deductible employee social events must primarily be for the benefit of non-highly compensated employees, meaning employees who:

• Haven’t owned more than 5% of the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
• Didn’t receive compensation from the business exceeding $135,000 in 2022. (This factor is based on compensation from the previous tax year.)

Note, too, that the party must be exclusively for employees (with exceptions for employees’ family members and other guests who aren’t customers). If you also invite clients or customers, your expenses probably will be only partially deductible due to limits on the deductibility of business meals and entertainment. (See “Tax Rules for Client Gifts and Parties” at right).

Employee Gifts

The taxability of gifts to employees is less clear-cut. It largely turns on whether the gift is one the IRS would recognize as a de minimis benefit. If so, the gift isn’t includable in the employee’s gross income for tax purposes, though it’s still deductible for the employer. If a gift is included in an employee’s gross income, it’s subject to both income taxes and payroll taxes.

The IRS defines a de minimis benefit as one — given its value and the frequency with which it’s provided — that’s so small that accounting for it is unreasonable or administratively impractical. An essential element is that a de minimisgift is occasional or unusual in frequency — and it can’t be a form of disguised compensation.

The IRS has provided a list of such items that includes holiday gifts. But the agency has ruled that items with a value exceeding $100 can’t be considered de minimis, even under unusual circumstances.

In addition, the IRS has indicated that gift certificates that are redeemable for general merchandise or have a cash equivalent aren’t de minimis benefits. As such, they’re taxable to employee recipients.

On the other hand, an exception may apply to a certificate that permits an employee to receive a specific item of personal property that’s minimal in value, provided infrequently and administratively impractical to account for. So, if you give coupons to your employees for, say, a holiday ham or turkey, neither of which has a redeemable cash value, the gifts probably won’t be taxable to the employees.

The IRS has identified several other de minimis benefits that can give you nontaxable gift ideas at the holidays. For example, tickets to a one-time theater or sporting event should be nontaxable (but season tickets would be taxable). Flowers, fruit and books “provided under special circumstances” also may pass muster with the IRS.

What about a “holiday” cash bonus paid at year end? The IRS considers that to be taxable supplemental wages, even if it’s not specifically based on work performance or achievements (for example, sales quotas). Further, if you pay the employee’s share of taxes on a bonus, the taxes paid are considered additional wages to the employee and subject to payroll taxes.

Ring In the Holidays

Small gestures can go a long way with your employees, but even seemingly small gifts can lead to unexpected tax consequences. Check with your CPA at Beers, Hamerman, Cohen & Burger, PC. to help ensure your holiday appreciation doesn’t end up giving your workers the “gift” of a higher tax bill down the road.