Relief for Certain RMDs from Inherited Retirement Accounts for 2024
IRS issued in 2022, a proposed regulations regarding required minimum distributions (RMDs) to reflect changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The IRS has held off on releasing final regulations so that it can address additional changes to RMDs made by the SECURE 2.0 Act of 2022. In the meantime, the IRS has issued interim relief and guidance for certain RMDs from inherited retirement accounts for 2024. The IRS anticipates that final RMD regulations, when issued, will apply starting in 2025.
RMD basics
Certain RMDs must be taken from individual retirement accounts (IRAs) and employer retirement accounts, or a penalty will apply. IRA owners and employees with employer retirement plans must generally take RMDs during their lifetime.
RMDs are generally required to begin by April 1 of the year after the individual reaches RMD age. RMD age is 70½ (if born before July 1, 1949), 72 (if born July 1, 1949, through 1950), 73 (if born in 1951 to 1959), or 75 (if born in 1960 or later). An employee still working for the employer maintaining an employer retirement account may be able to wait until April 1 of the year after the employee retires (if that is later and the plan allows it). The applicable April 1 date is often referred to as the required beginning date (RBD).
Lifetime distributions are not required from Roth accounts and, as a result, Roth account owners are always treated as dying before their RBD. Prior to 2024, these two special rules for Roth accounts applied to Roth IRAs, but not to Roth employer retirement plans.
Beneficiaries must also take RMDs from an inherited retirement account (including Roth accounts) after the death of an IRA owner or employee.
Inherited IRAs and retirement plans
RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary. The SECURE Act changed the RMD rules by requiring that in most cases the entire account must be distributed 10 years after the death of the IRA owner or employee if there is a designated beneficiary (and if death occurred after 2019). However, an exception allows an eligible designated beneficiary to take distributions over their life expectancy and the 10-year rule would not apply until after the death of the eligible designated beneficiary in that case.
Eligible designated beneficiaries include a spouse or minor child of the IRA owner or employee, a disabled or chronically ill individual, and an individual no more than 10 years younger than the IRA owner or employee. The entire account would also need to be distributed 10 years after a minor child reaches the age of majority (i.e., distributed at age 31).
The proposed regulations issued in early 2022 surprised many when they suggested that annual distributions are also required during the first nine years of such 10-year periods in most cases. Comments on the proposed regulations sent to the IRS asked for some relief because RMDs had already been missed and a 25% penalty tax (50% prior to 2023) is assessed when an individual fails to take an RMD.
The IRS announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2024 during one of the 10-year periods. (Similar relief was previously provided for 2021, 2022, and 2023.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, 2022, or 2023 and on or after their RBD (see “RMD basics” above) and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021, 2022, 2023, or 2024 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an eligible designated beneficiary died in 2020, 2021, 2022, or 2023 and annual distributions were not taken in 2021, 2022, 2023, or 2024 as required (during the 10-year period following the eligible designated beneficiary’s death).
The rules relating to RMDs are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules apply to your individual situation.
What Stubborn Inflation Could Mean for the U.S. Economy
The U.S. Bureau of Labor Statistics April 10, 2024 released the Consumer Price Index (CPI) for March, and the increase in CPI — the most cited measure of inflation — was higher than expected. The rate for all items (headline inflation) was 3.5% over the previous year, while the “core CPI” rate, which strips out volatile food and energy prices, was even higher at 3.8%. The month-over-month change was also higher than anticipated at 0.4%.1
The stock market dropped sharply on this news and continued to slide over the following days, while economists engaged in public handwringing over why their projections had been wrong and what the higher numbers might mean for the future path of interest rates. In fact, most projections were off by just 0.1% — core CPI was expected to increase by 3.7% instead of 3.8% — which hardly seems earth-shattering to the casual observer. But this small difference suggested that inflation was proving more resistant to the Federal Reserve’s high interest-rate regimen.2
It’s important to keep in mind that the most dangerous battle against inflation seems to have been won. CPI inflation peaked at 9.1% in June 2022, and there were fears of runaway inflation like the 1980s. That did not happen, and inflation declined steadily through the end of 2023. The issue now is that there has been upward movement during the first three months of 2024.3 This is best seen by looking at the monthly rates, which capture the current situation better than the 12-month rates. March 2024 was the third month in a row of increases that point to higher inflation.
High for longer
While price increases hit consumers directly in the pocketbook, the stock market reacted primarily to what stubborn inflation might mean for the benchmark federal funds rate and U.S. businesses. From March 2022 to July 2023, the Federal Open Market Committee (FOMC) raised the funds rate from near-zero to the current range of 5.25%–5.5%, to slow the economy and hold back inflation. At the end of 2023, with inflation apparently moving firmly toward the Fed’s target of 2%, the FOMC projected three quarter-percentage point decreases in 2024, and some observers expected the first decrease might be this spring. Now it’s clear that the Fed will have to wait to reduce rates.4–5
Higher interest rates make it more expensive for businesses and consumers to borrow. For businesses, this can hold back expansion and cut into profits when revenue is used to service debt. This is especially difficult for smaller companies, which often depend on debt to grow and sustain operations. Tech companies and banks are also sensitive to high rates.6
In theory, high interest rates should hold back consumer spending and help bring prices down by suppressing demand. So far, however, consumer spending has remained strong. In March 2024, personal consumption expenditures — the standard measure of consumer spending — rose at an unusually strong monthly rate of 0.8% in current dollars or 0.5% when adjusted for inflation.7 The job market has also stayed strong, with unemployment below 4% for 26 consecutive months and wages rising steadily.8 The fear of keeping interest rates high for too long is that it could slow the economy too much, but that is clearly not the case, making it difficult for the Fed to justify rate cuts.
What’s driving inflation?
The Consumer Price Index measures price changes in a fixed market basket of goods and services, and some inputs are weighted more heavily than others. The cost of shelter is the largest single category, accounting for about 36% of the index and almost 38% of the March increase in CPI.9 The good news is that measurements of shelter costs — primarily actual rent and estimated rent that homeowners might receive if they rented their homes — tend to lag current price changes, and other measures suggest that rents are leveling or going down.10
Two lesser components contributed well above their weight. Gas prices, which are always volatile, made up only 3.3% of the index but accounted for 15% of the overall increase in CPI. Motor vehicle insurance prices made up just 2.5% of the index but accounted for more than 18% of the increase. Together, shelter, gasoline, and motor vehicle insurance drove 70% of March CPI inflation. On the positive side, food prices made up 13.5% of the index and rose by only 0.1%, effectively reducing inflation.11
While the Fed pays close attention to the CPI, its preferred inflation measure is the personal consumption expenditures (PCE) price index, which places less emphasis on shelter costs, includes a broader range of inputs, and accounts for changes in consumer behavior. Due to these factors, PCE inflation tends to run lower than CPI. The annual increase in March was 2.7% for all items and 2.8% for core PCE, excluding food and energy. The monthly increase was 0.3% for both measures.12
Although these figures are closer to the Fed’s 2% target, they are not low enough in the face of strong employment and consumer spending to suggest the Fed will reduce interest rates anytime soon. It’s also unlikely that the Fed will raise rates. For now, the central bank seems poised to give current interest rates more time to push inflation down to a healthy level, ideally without significant slowing of economic activity.13
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Projections are based on current conditions, subject to change, and may not happen.
1, 3, 8–9, 11) U.S. Bureau of Labor Statistics, 2024
2)The New York Times, April 10, 2024
4) Federal Reserve, 2023
5) Forbes, December 5, 2023
6) The Wall Street Journal, April 15, 2024
7, 12) U.S. Bureau of Economic Analysis, 2024
10) NPR, April 18, 2024
13) Bloomberg, April 19, 2024
What to Know About T Plus 1 Trade Settlement
On May 28, 2024, settlement cycles on U.S. stocks and other securities will shift from two business days to one. For most investors, this shift will have little or no impact. But it will affect some investors and certain types of transactions. It may be helpful to understand the basics of this important change.
T+1 vs. T+2
The trade date (T) is the day your order to buy or sell a security is executed. The settlement date is the day your order is finalized, and when the funds used to purchase the security and any sold securities must be delivered. Put simply, T+1 means most transactions will settle on the next business day after the trade.
For example, under the current T+2 protocol, if you sell shares of a stock on a Monday, the transaction will settle in two business days on Wednesday. Beginning on May 28, 2024, if you sell shares of a stock on a Monday, the transaction will settle in one business day on Tuesday.
Who will T+1 affect?
T+1 will have minimal or no impact on most investors because most brokerage firms require cash or sufficient margin in an account prior to the investor entering any orders to purchase securities in the account. However, if your brokerage firm allows you to make a purchase without sufficient funds in the account, under T+1 you will need to deliver a check or initiate a funds transfer so that the funds are deposited in your brokerage account no later than the next business day.
Another potential effect of T+1 on some investors may be the tighter timeframe to deliver paper certificates for securities that are sold. This is rare today, because investors typically hold securities in their accounts electronically, and the shorter timeframe should not affect electronic transfers. However, if you do wish to sell a security for which you hold a paper certificate, you should be prepared to deliver it to the brokerage firm no later than the next business day after the trade is executed.
Securities affected include stocks, bonds, exchange-traded funds, certain mutual funds, municipal securities, real estate investment trusts, and master limited partnerships traded on U.S. exchanges. This change will not affect government bonds and options as their settlement is already set at T+1.
Establishing accurate cost basis
When selling a security, any capital gains taxes are calculated using the security’s cost basis, which is the initial amount invested plus any commissions or fees and reinvested dividends and distributions. Under most circumstances, the change to T+1 will have no effect on figuring cost basis. However, if you purchased a security through more than one brokerage firm, you would have one less day to provide information on the previous purchase(s) to your current firm. Once settlement is complete, your cost basis is established for tax purposes. The best practice is to make sure your current brokerage has full cost-basis information on any securities purchased at previous brokerages.
For more information, see IRS Publication 550, which offers detailed guidance on how to calculate cost basis under different circumstances.
Convenience and close attention
For some investors, one-day settlement may mean greater convenience. In effect, an investor will fully own a security one day sooner than under the current system. This could be helpful for an investor who wants to trade the security quickly or wants to participate in a proxy vote. However, T+1 will also require some investors to pay closer attention to how the shorter settlement time could affect investment, trading, or tax decisions.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
FAFSA Glitches Delay College Financial Aid Awards for 2024-25
It’s been a tough financial aid season for college students and their families. The FAFSA (Free Application for Federal Student Aid) was redesigned and simplified for the 2024-25 school year, in what was supposed to benefit families completing the application. But a late rollout and the subsequent discovery of form calculation errors have led to processing delays and, by extension, delays for colleges sending out student financial aid packages for the 2024-25 school year.
Both new and returning college students are affected because students must submit the FAFSA each year to be eligible for federal financial aid. But the series of delays may be particularly painful for new students who are waiting to review and compare financial aid packages from multiple colleges before making a final decision by the general May 1 college admissions deadline.
A slow rollout for the new, simplified FAFSA
The FAFSA Simplification Act (part of the Consolidated Appropriations Act of 2021) gave the go-ahead for a shorter, more streamlined FAFSA. The new, simplified form was heralded as a bipartisan breakthrough and a win for families trying to navigate and complete the application. The full redesign was scheduled to take effect with the 2023-24 FAFSA but was delayed a year due to the pandemic.
The new 2024-25 FAFSA arrived with almost two-thirds fewer questions and a mandatory IRS direct data exchange tool to import income information from tax returns, two changes intended to make the form easier to complete. But the public rollout of the 2024-25 FAFSA was delayed three months, from the usual October 1 open date to December 31, 2023. This extra time was due to several new calculations and adjustments to the aid formula and the technical integration needed to embed them into the form. Along with a new aid formula, the terminology changed too: a new “student aid index” (SAI) replaced the well-known “expected family contribution” (EFC) as the yardstick for measuring a student’s aid eligibility.
Subsequent calculation errors
Once the 2024-25 FAFSA opened in late December, various online glitches disrupted public access to the form during the month of January. Then on January 30, the Department of Education announced that inflation adjustments were being made to the aid calculation, which opened a potential additional $1.8 billion in aid but would delay processing of the form until March, leading to delays in families receiving aid awards from colleges. (In a typical year when the FAFSA is available in October, students can start receiving college aid awards by the end of the calendar year, though timelines vary by college.)
Then on March 22, the Department of Education announced another form error that affected the student aid index calculation for dependent students who reported assets, requiring another round of reprocessing for all affected applications. The Department continues to provide information and tools for families on studentaid.gov about completing the 2024-25 FAFSA.
Colleges and students left scrambling
In the meantime, colleges need time to review incoming FAFSAs, model student aid eligibility, and package and communicate financial aid offers to students. The result is that high school seniors may not receive their financial aid packages from colleges until April, May, or even June, which means they might have to commit to a college by the May 1 deadline without fully knowing how much it will cost them out-of-pocket.
Families with high school seniors may want to contact individual colleges to see when aid packages might be expected and/or whether the college plans to extend its decision deadline beyond May 1. Returning students may also want to contact their college about their aid package. Due to the new FAFSA formula for calculating aid, returning students may discover that their aid eligibility (in the form of their student aid index) is higher or lower now, which could affect their aid package.
Source) U.S. Department of Education, 2024
International Investing: The Diverging Fortunes of China and Japan
The MSCI EAFE Index, which tracks developed markets outside of the United States, advanced 15% in 2023, while U.S. stocks in the S&P 500 Index returned 24%.1 One of the world’s hottest developed stock markets was in Japan, where the Nikkei 225 rose 28% in 2023, delivering the best performance in Asia.2 On the other hand, in China — which is still considered an emerging market — the benchmark CSI 300 Index lost more than 11% over the same period.3
Investing internationally provides growth opportunities that may be different than those in the United States, which could help boost returns and/or enhance diversification in your portfolio. It may help to consider the risks, economic forces, and government policies that might continue to impact stock prices in these two news-making Asian markets and elsewhere in the world.
A tale of two economies
Ranked by gross domestic product (GDP), a broad measure of a nation’s business activity, China is the world’s second-largest economy after the United States.4 Japan fell from third place to fourth, behind Germany, at the end of 2023.5
In February 2024, the Nikkei surpassed a peak last seen in 1989.6 Conversely, Chinese stocks fell more than 40% from their peak in June 2021, before turning up slightly in February and March.7
GDP growth in Japan has been lackluster; in fact, the nation barely averted a recession at the end of 2023.8 What has been driving the market’s outperformance? After battling deflation (or falling prices) for more than two decades, the emergence of inflation in Japan has been good for businesses. Japanese companies have been putting their capital to work, growing profits, and returning them to shareholders, which has attracted foreign investors. A weaker yen helped by making Japanese products cheaper overseas.9 The Bank of Japan ended the era of negative interest rates when it raised short-term rates on March 19, 2024.10
China’s GDP growth slowed to about 5.2% in 2023, as weaker consumption and investment cut into business activity. China is still growing faster than most advanced nations, but it’s contending with a years-long real estate crisis.11 Deflation has set in, while underemployment and youth unemployment have risen to high levels, damaging consumer confidence.12 Moreover, a visible government crackdown on the private sector has rattled investors and scared away many foreign firms.13 In early 2024, the Chinese government took steps to help stabilize the stock market that included boosting liquidity, supporting property developers, and encouraging more bank lending and homebuying.14
Global economic outlook
The International Monetary Fund sees a path to a soft landing for the global economy, projecting steady growth of 3.1% for 2024, about the same rate as 2023. Inflation, which has fallen rapidly in most regions, is expected to continue its descent.15
The downside risks to this hopeful outlook include fiscal challenges, high debt levels, and lingering economic strain from high interest rates. Price spikes caused by geopolitical conflict, supply disruptions, or more persistent underlying inflation could prevent central banks from loosening monetary policies. The possibility of further deterioration in China’s property sector is another cause for concern.16
A world of opportunity
It can be more complicated to perform due diligence and identify sound investments in unfamiliar and less transparent foreign markets, and there are potential risks that may be unique to a specific country. Mutual funds or exchange-traded funds (ETFs) provide a relatively effortless way to invest in a variety of international stocks. International funds range from broad global funds that attempt to capture worldwide economic activity, to regional funds and others that focus on a single country. The term “ex U.S.” or “ex US” typically means that the fund does not include domestic stocks, whereas “global” or “world” funds may include a mix of U.S. and international stocks.
Some funds are limited to developed nations, whereas others concentrate on nations with emerging (or developing) economies. The stocks of companies located in emerging nations might offer greater growth potential, but they are riskier and less liquid than those in more advanced economies. For any international stock fund, it’s important to understand the mix of countries represented by the underlying securities.
It may be tempting to increase your exposure to a booming foreign market. However, chasing performance might cause you to buy shares at high prices and suffer more severe losses when conditions shift. And if your long-term investment strategy includes international stocks, be prepared to hold tight — or take advantage of lower prices — during bouts of market volatility.
Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. The return and principal value of all stocks, mutual funds, and ETFs fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Supply and demand for ETF shares may cause them to trade at a premium or a discount relative to the value of the underlying shares. Foreign securities carry additional risks that may result in greater share price volatility, including differences in financial reporting and currency exchange risk; these risks should be carefully managed with your goals and risk tolerance in mind. Projections are based on current conditions, are subject to change, and may not happen.
Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) London Stock Exchange Group, 2024
2) CNBC.com, December 28, 2023
3, 7) Yahoo! Finance, 2024 (data for the period 6/01/2021 through 3/20/2024)
4, 13) The Wall Street Journal, March 18, 2024
5) CNBC.com, February 14, 2024
6, 9) The Wall Street Journal, February 22, 2024
8, 10) CNBC.com, March 19, 2024
11, 15–16) International Monetary Fund, January 2024
12) The Wall Street Journal, January 27, 2024
14) Bloomberg, February 7, 2024
Can Productivity Keep Driving the U.S. Economy?
Productivity of U.S. workers increased by 2.7% in 2023 — well above the average annual rate of 2.1% since the end of World War II, and a dramatic change from 2022, when productivity dropped by 2.0%. It’s also a substantial improvement over the 0.9% growth rate in 2021.1
According to the nonpartisan Congressional Research Service, “Productivity growth is a primary driver of long-term economic growth and improvements in living standards.”2 On a more immediate level, the productivity surge in 2023 may help explain why the U.S. economy was able to grow at a strong pace while inflation dropped.
Doing more with less
Broadly, productivity is the ratio of output to inputs. A productivity increase means that output increases faster than input, essentially producing more with less.
The most cited productivity measure for the U.S. economy is labor productivity for the nonfarm business sector (the data cited in the first paragraph of this report). In simple terms, this is the value of goods and services produced per hour of labor. The nonfarm business sector comprises most U.S. business activity excluding farms, general government, and nonprofits.
Boosting GDP while fighting inflation
The 2.7% increase in 2023 means that, on average, 2.7% more value was created for each hour of labor. This helps boost gross domestic product (GDP), while also helping to control inflation by holding back the wage-price spiral, which can push inflation out of control.
In a tight employment market, as we have had for some time, a shortage of workers can force businesses to offer higher wages, which they pass on to consumers as higher prices. Because consumers are then earning more at their jobs, they demand more goods and services and are willing to pay higher prices, which pushes businesses to hire more workers at higher wages, continuing the cycle. Increased productivity allows business to keep prices lower even as they pay workers more. This seems to have occurred in 2023, with average hourly wages rising by 4.3%, while inflation dropped to 3.4% — the first time since the pandemic that wages increased faster than inflation.3
Compensating for demographics
Increasing productivity is especially important for the U.S. economy because of lower birth rates, the aging of the population, and more young people staying in school. The labor force participation rate, which measures the percentage of people age 16 and older who are working or looking for work, peaked in early 2000 and has trended downward since then.4 Higher productivity enables a smaller workforce to drive economic growth on a level that would require a larger workforce without productivity gains.
Why is productivity increasing and can it be sustained?
Increases in labor productivity are typically driven by improved tools and technology, more efficient processes and organizations, and increased worker experience, education, and training. The proliferation of computers in the workplace spurred a productivity surge in the 1990s, and some analysts point to artificial intelligence (AI) as contributing to the 2023 increase. It’s possible that AI has already improved some businesses, but any large-scale impact may take years, as businesses integrate AI through worker training and new processes. As this unfolds, AI could help drive a long-term productivity surge.
A more immediate explanation for the current increase may be adjustment and experience with the hybrid work model. A recent survey found that 43% of remote workers felt working from home makes them more productive, while only 14% believed it makes them less productive. (Another 43% said it makes no difference.)5 The ideal situation would allow employees to work in the most productive environment. Three years after the pandemic, businesses may be improving that balance, and it’s possible that further developments in hybrid work could continue to drive productivity gains for some time.
New businesses can spur productivity through innovation, filling specialized niches, and producing specific goods or services more efficiently. New business applications surged during and after the pandemic, with more than 20 million from 2020 to 2023. Only about 10% of applications turn into businesses, but some new enterprises may already be making a difference, and the surge of entrepreneurship bodes well for future productivity.6
A less positive factor may be that some companies laid off employees and made other changes in 2023 in anticipation of a recession that never materialized. Layoffs typically target the least productive employees, and remaining employees may increase their productivity to maintain production levels. While this “lean” model is not always sustainable, it can boost productivity in the short term, and technology and more efficient processes may enable some businesses to stay lean.
Volatile data
Measuring productivity is difficult, especially in service industries, which now comprise the largest sector of U.S. economic activity. For this reason, productivity data can be volatile and often changes with revision. (The 2.7% Q4 data is preliminary.) Even so, the surge in 2023 seems solid, and enhancements such as artificial intelligence, hybrid work, and new business innovation could usher in a sustained period of productivity growth. The Bureau of Labor Statistics releases productivity data quarterly, with Q1 2024 data coming in May. You might keep an eye out for a continuing trend.
1, 3–4) U.S. Bureau of Labor Statistics, 2024
2) Congressional Research Service, January 3, 2023
5) Bloomberg, January 30, 2024
6) U.S. Chamber of Commerce, February 2, 2024
Tax Relief Legislation in “Progress”?
Legislation that could benefit parents and business-owners is currently moving through Congress. The House has passed the Tax Relief for American Families and Workers Act of 2024. It now faces an uncertain future in the Senate. The legislation would make changes to the child tax credit and to certain business tax provisions. Some significant provisions in the legislation that may provide tax relief are summarized below.
Child tax credit provisions
If enacted, the legislation may increase the availability and amount of the child tax credit.
- The formula for calculation of the refundable portion of the child tax credit would be modified to take into account the number of children a parent has (effective for 2023, 2024, and 2025).
- The overall limit on the refundable portion of the child tax credit would increase from $1,600 in 2023 and $1,700 in 2024 to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025.
- The $2,000 maximum child tax credit would be adjusted for inflation in 2024 and 2025.
- In 2024 and 2025, earned income from the prior taxable year would be able to be used in calculating the maximum child tax credit if earned income for the current year is less than earned income for the prior year.
Business tax provisions
The legislation includes several business tax provisions that generally allow the acceleration of expense deductions.
- Under current law, domestic research or experimental expenditures paid or incurred in taxable years beginning after December 31, 2021, must be deducted over a five-year period. The legislation would allow such expenditures paid or incurred in taxable years beginning after December 31, 2021, and before January 1, 2026, to be fully deductible in the year paid or incurred.
- For purposes of calculating the limitation on the deduction of business interest, the legislation would allow adjusted taxable income to be determined without regard to any allowance for depreciation, amortization, or depletion for taxable years beginning after December 31, 2023, and before January 1, 2026 (with similar treatment for 2022 and 2023, if elected).
- In recent years, the special additional first-year depreciation allowance, or bonus depreciation, has been decreasing under current law — reaching 80% in 2023 and 60% in 2024. The legislation would allow 100% bonus depreciation for qualified property placed in service after December 31, 2022, and before January 1, 2026.
- Section 179 expensing allows the cost of qualified property to be expensed, rather than recovered through depreciation. The maximum amount that can be expensed is $1,220,000 in 2024, reduced to the extent the cost of Section 179 property placed in service during the year exceeds $3,050,000 in 2024. The legislation would increase those amounts to $1,290,000 and $3,220,000 in 2024 (and adjust for inflation in 2025).
There’s Still Time to Fund an IRA for 2023
The tax filing deadline is fast approaching, which means time is running out to fund an IRA for 2023. If you had earned income last year, you may be able to contribute up to $6,500 for 2023 ($7,500 for those age 50 or older by December 31, 2023) up until your tax return due date, excluding extensions. For most people, that date is Monday, April 15, 2024.
You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2023, even if your spouse had no earned income.
Traditional IRA contributions may be deductible
If you and your spouse were not covered by a work-based retirement plan in 2023, your traditional IRA contributions are fully tax deductible. If you were covered by a work-based plan, you can take a full deduction if you’re single and had a 2023 modified adjusted gross income (MAGI) of $73,000 or less, or married filing jointly with a 2023 MAGI of $116,000 or less. You may be able to take a partial deduction if your MAGI fell within the following limits.
| 2023 income ranges for a partial deduction for traditional IRA contributions: | ||
|---|---|---|
| Covered by a work-based plan and filing as: | Partial deduction if your MAGI is between: | No deduction if your MAGI is: |
| Single/Head of household | $73,000 and $83,000 | $83,000 or more |
| Married filing jointly | $116,000 and $136,000 | $136,000 or more |
| Married filing separately | $0 and $10,000 | $10,000 or more |
If you were not covered by a work-based plan but your spouse was, you can take a full deduction if your joint MAGI was $218,000 or less, a partial deduction if your MAGI fell between $218,000 and $228,000, and no deduction if your MAGI was $228,000 or more.
Consider Roth IRAs as an alternative
If you can’t make a deductible traditional IRA contribution, a Roth IRA may be a more appropriate alternative. Although Roth IRA contributions are not tax-deductible, qualified distributions are tax-free. You can make a full Roth IRA contribution for 2023 if you’re single and your MAGI was $138,000 or less, or married filing jointly with a 2023 MAGI of $218,000 or less. Partial contributions may be allowed if your MAGI fell within the following limits.
| 2023 income ranges for partial contributions to a Roth IRA: | ||
|---|---|---|
| Partial contributions are allowed if your MAGI is between: | You cannot contribute if your MAGI is: | |
| Single/Head of household | $138,000 and $153,000 | $153,000 or more |
| Married filing jointly | $218,000 and $228,000 | $228,000 or more |
| Married filing separately | $0 and $10,000 | $10,000 or more |
Tip: If you can’t make an annual contribution to a Roth IRA because of the income limits, there is a workaround. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA contribution to a Roth IRA. (This is sometimes called a backdoor Roth IRA.) Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion.
A qualified distribution from a Roth IRA is one made after the account is held for at least five years and the account owner reaches age 59½, becomes disabled, or dies. If you make an initial contribution — no matter how small — to a Roth IRA for 2023 by your tax return due date, and it is your first Roth IRA contribution, your five-year holding period starts on January 1, 2023.
You have until your tax return due date, excluding extensions, to contribute up to $6,500 for 2023 ($7,500 if you were age 50 or older on December 31, 2023) to all IRAs combined. For most taxpayers, the contribution deadline for 2023 is April 15, 2024.
Tax Season News and Survival Tips
It’s not easy to keep up with complex tax laws that always seem to be changing, much less figure out how they might affect you personally. Even so, it’s important to consider the potential impact of taxes when making many types of financial decisions.
The IRS automatically adjusts the standard deduction and income tax brackets annually for inflation. The rate of inflation rose to 40-year highs in 2022, so the 7% increases for 2023 are the largest since these adjustments began in 1985.¹ The standard deduction is $13,850 for single filers in 2023 (up $900 from 2022) and $27,700 for married joint filers (up $1,800).
The filing deadline for 2023 federal income tax returns is April 15, 2024, (April 17 in Maine and Massachusetts, due to local holidays). Even though the 2024 tax year is well underway, there may still be time to take steps that lower your tax liability for 2023.
Understand “marginal” tax rates
U.S. tax rates increase at progressively higher income levels or brackets. If your taxable income goes up and moves you into a higher bracket, the resulting tax increase might not be as bad as it may appear at first glance. For example, if you and your spouse are filing jointly for 2023 and have a taxable income of $110,000, you are in the 22% tax bracket. However, you will not pay a 22% rate on all your income, only on the amount over $94,300.
Determining the value of certain deductions also depends on where your income falls in the tax brackets. Using the same example, a $10,000 deduction would reduce your income from $110,000 to $100,000 and theoretically reduce your tax liability by $2,200 (22% x $10,000). For a $20,000 deduction, you would have to calculate the amount of the deduction that falls in the 22% and 12% brackets: 22% x $15,700 + 12% x $4,300 ($3,454 + $516 = $3,970).
Although it’s helpful to know your marginal rate, your effective tax rate — the average rate at which your income is taxed (determined by dividing your total taxes by taxable income) — may offer a better way to gauge your tax liability.
Deduct large casualty losses
Wildfires, tornadoes, severe storms, flooding, landslides. The United States was struck by a record number of billion-dollar catastrophes in 2023.² If something you own was damaged or destroyed by a disaster, and your loss exceeds 10% of your adjusted gross income (AGI) plus $100, you may be able to claim an itemized deduction on your federal income tax return. This typically applies to large losses that are uninsured or subject to a high deductible. For 2018 to 2025, a personal casualty loss is deductible only if it is attributable to a federally declared disaster.
The rules relating to casualty losses can be complicated. If you have suffered a significant loss, it may be worthwhile to consult a tax professional.
Apply for an extension
If you can’t meet the filing deadline for any reason, you can file for and obtain an automatic six-month extension using IRS Form 4868. (Otherwise, if you owe taxes, you might face a failure-to-file penalty.) You must file for an extension by the original due date for your return. For most individuals, that’s April 15, 2024; the deadline for extended returns is October 15, 2024.
An extension to file your tax return does not postpone payment of taxes. Estimate your tax liability and pay the amount you expect to owe by the original due date. Any taxes not paid on time will be subject to interest and possible penalties.
Pay yourself instead
Making deductible contributions for 2023 to a traditional IRA and/or an existing qualified health savings account (HSA) could lower your tax bill and pad your savings. If eligible, you can contribute to your accounts up to the April 15, 2024, tax deadline.
The 2023 IRA contribution limit is $6,500 ($7,000 in 2024). If you’re 50 or older, you can make an additional $1,000 catch-up contribution. If you or your spouse is covered by a retirement plan at work, eligibility to deduct contributions phases out at higher income levels.
If you were enrolled in an HSA-eligible health plan in 2023, you can contribute up to $3,850 for individual coverage or $7,750 for family coverage. (The limits for 2024 are $4,150 and $8,300, respectively.) Each eligible spouse who is 55 or older (but not enrolled in Medicare) can contribute an additional $1,000.
Avoid scams and costly mistakes
Tax season is prime time for identity thieves who may fraudulently file a tax return in your name and claim a refund — which could delay any refund owed to you. Or you might receive threatening phone calls or emails from scammers posing as the IRS and demanding payment. Remember that the IRS will never initiate contact with you by email to request personal or financial information, and will never call you about taxes owed without sending a bill in the mail. If you think you may owe taxes, contact the IRS directly at irs.gov.
The IRS has examined less than 0.5% of all individual returns in recent years, but the agency has stated plans to increase audits on high-income taxpayers and large businesses to help recover lost tax revenue. Wherever your income falls, you probably don’t want to call attention to your return.3 Double-check any calculations you do by hand. If you use tax software, scan the entries to make sure the math and other information are accurate. Be sure to enter all income, and use good judgment in taking deductions. Keep all necessary records.
Finally, if you have questions regarding your individual circumstances and/or are not comfortable preparing your own return, consider working with an experienced tax professional.
1) The Wall Street Journal, October 18, 2022
2) National Oceanic and Atmospheric Administration, 2024
3) Internal Revenue Service, 2024
January 24, 2024 Starts the 2023 Federal Tax Filing
IRS suggest steps to make tax filing easier
- Make sure you have received Form W-2 and other earnings information, such as Form 1099, from employers and payers. The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2024. You may need to allow additional time for mail delivery.
- Go to irs.gov to find the federal individual income tax returns, Form 1040 and Form 1040-SR (available for seniors born before January 2, 1959), and their instructions.
- File electronically and use direct deposit.
- Check irs.gov for the latest tax information.
Key dates to keep in mind
- January 12. IRS Free File opened. IRS Free File Guided Tax Software, available only at irs.gov, allows participating software companies to accept completed tax returns of any taxpayer or family with an adjusted gross income of $79,000 or less in 2023 and hold them until they can be electronically filed with the IRS starting January 29. Beginning January 29, Free File Fillable forms will be available to taxpayers of any income level to fill out and e-file themselves at no cost.
- January 29. IRS begins accepting and processing individual tax returns.
- April 15. Deadline for filing 2023 tax returns (or requesting an extension) for most taxpayers.
- April 17. Deadline for taxpayers living in Maine or Massachusetts.
- October 15. Deadline to file for those who requested an extension on their 2023 tax returns.
Tax refunds
The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. The IRS expects to issue most tax refunds within 21 days of their receiving a tax return if the return is filed electronically, the tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.
