2023 Year-End Tax Guide for Individuals

Each year, Aldrich creates a year-end tax guide with must-know information for your financial plan. Our experts have compiled the latest insights and opportunities to help you achieve your financial goals. The guides are divided into recommendations for businesses and individuals.

We hope this guide serves as a beacon for your upcoming financial planning. If you have questions or concerns about 2023 and 2024 tax planning, please reach out to your Aldrich Advisor.

After the “crypto winter” of 2022, the world has seen an overall increase in the values of virtual currencies and virtual assets supported and based on blockchain technology. Collectively, these are referred to as “digital assets.”

As virtual currency grows in popularity, the Internal Revenue Service (IRS) is expanding its examination of these assets and transactions. For example, in 2019, the IRS began requiring taxpayers to note if they had received virtual assets as income or if they had disposed of them; this question will continue to be on the 2023 tax return. The IRS is increasingly getting more information from companies that house and maintain custody of digital assets—information it may use as a cross-reference point in future tax audits.

Additional legislation is being drafted with other economic packages concerning cryptocurrency. It may have sweeping ramifications for businesses using digital assets in their day-to-day operations and brokers tracking the sales for their customers.

If you are mining cryptocurrencies or supporting blockchain via proof of stake or work computations, you may have associated business income subject to self-employment and income taxes. In 2023, the IRS issued Rev. Rul. 2023-14, which affirms that rewards from staking transactions are taxable income at the point at which the taxpayer has dominion and control over the awarded tokens.

The continued evolution in decentralized finance may lead to an increase in complex transactions, creating an emphasis on record-keeping.

Similar to buying and selling stocks, digital assets should be managed carefully. Many third-party sites offer programs to track and compute unrealized gains and losses and manage transfers between wallets. Using these tools, you can evaluate your positions and make informed decisions.

Aldrich Insights

We recommend managing capital gains by harvesting losses if you invest in digital assets. Since digital assets are classified as property for tax purposes, wash sale rules currently do not apply when selling positions at a loss. Thus, you may sell a digital asset in a loss position to offset recognized gains from earlier in the year and have a smaller net taxable gain between the transactions. This has been a focus of draft legislation this past year and may change in the future.

Additionally, investors should determine where virtual assets are located, especially if any are in foreign accounts. Digital assets housed outside of the US may be subject to foreign income regulations or accounting reporting rules. Regulatory compliance for these assets can be complex, and the associated penalties are steep.

Finally, individuals and organizations should be aware of a reporting requirement from the Financial Crimes Enforcement Network (FinCEN). Accounts holding more than $10,000 at any time during the calendar year in fiat money—cash and securities—in foreign cryptocurrency exchanges must be reported on a Foreign Bank Accounting Report (FBAR), also known as FinCEN 114. You do not need to file if all your holdings are in cryptocurrency.

Reach out to your Aldrich Advisor to discuss the implications of cryptocurrencies and learn more about how these investments might affect your taxes now and in the future.

This year’s lifetime gift tax exemption of $12.92 million is a significant increase from 2022. However, the exemption will revert to the pre-2018 level of $5 million, as adjusted for inflation, in 2026.

Individuals with more than $25 million of combined wealth should consider various lifetime gifting strategies before certain estate tax-saving opportunities are gone.

Start with a comprehensive financial plan to ensure your remaining financial resources will allow you to live comfortably after making a gift. Because gifts are irrevocable, you can’t get those assets back, even if your financial circumstances change. A financial plan should help guide you on how much, if any, you can give away.

• Once you determine the gift amount, avoid triggering 2023’s gift tax if your total lifetime transfers inadvertently exceed the threshold of $12.92 million per person and $25.84 million per married couple.
• Communicate all prior-year lifetime taxable gifts to your estate planning team, including reported and unreported gifts.
• Indirect gifts, which include supporting an adult child, paying life insurance premiums for insurance owned by a trust, birthdays, vacations, zero-interest loans, and even forgetting to take required distributions out of a trust each year, can add up. These must be accounted for and included in your annual gift reporting.
• Qualified business and property appraisers should perform valuations of business interests or other hard-to-value property transfers.

Other pending changes to the estate and gift tax law could affect your decision to gift. Currently, these estate planning techniques are still valid and can accomplish tax-efficient transfers of wealth:

• Intentionally Defective Grantor Trusts (IDGT) are effective for making a part gift and part sale of an asset while maintaining some cash flow after completing the transfer. Low interest rates and valuation discounts can help transfer more value and future asset appreciation to your beneficiaries.
• Spousal Lifetime Access Trusts (SLAT) are also a great way to make a large gift to your spouse and have a failsafe for them to access the trust funds.

Consider using other techniques to transfer wealth without affecting your lifetime exemption. These strategies do not count as a taxable gift but can transfer considerable wealth over time:

• Annual exclusion gifts of up to $17,000 per person.
• Making direct payments to medical providers for medical bills or qualifying educational institutions for grade school through higher education.
• Making low-interest loans using the IRS’s Applicable Federal Rates (AFR) for the term of the loan.
• Selling your business or other property to your children at today’s value on a low-interest loan using AFR rates to effectively freeze the value for estate tax purposes and still provide you an income stream.

Aldrich Insights

We recommend maintaining detailed records of your gifting activities. Take advantage of the current tax environment for significant gifts and, at minimum, evaluate wealth transfer options that will not affect your lifetime exemption amount. When making large gifts, your goal should be obtaining the best (and lowest possible) value while feeling confident that the valuation will be defensible should the IRS decide to take a closer look.

Gifting requires careful planning. If you are thinking about gifting, our  Trusts and Estates Team can help ensure your estate and gift tax plans are appropriately executed, and your strategy is relevant for the current tax year.

On Oct. 6, 2023, the IRS released guidance increasing access to the Inflation Reduction Act (IRA) credits at the point of sale for clean vehicles. Starting Jan. 1, 2024, consumers can lower the upfront cost by transferring their new clean vehicle credit (CVC) of up to $7,500 and used clean vehicle credit of up to $4,000 to the car dealer—rather than having to wait to claim the credit on their tax return the following year. Consumers may only elect to transfer the tax credit on two car purchases in one tax year.

Eligibility Requirements

These tax credits apply to qualifying electric vehicles (EV) and plug-in hybrid electric vehicles (PHEV) for personal use. The following table outlines the eligibility requirements.

To determine which specific make and model vehicles qualify for federal tax credits, visit the IRS and Department of Energy’s website. It provides information on the various tax incentives for specific makes and models of electric vehicles.

You can also rely on the dealership and the documentation they provide, which specifies whether a particular vehicle meets the requirements for the tax credit programs. Most manufacturers are expected to use tax credits as sales incentives, so purchasers can easily identify the applicable tax credits for the vehicles on their lots.

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Given the recent changes and various federal, state, and local programs, the tax credit landscape for buying an electric vehicle is complex. Remember to visit the official websites and consult with dealerships to obtain correct and up-to-date information about specific EV models and their associated incentives.

Also, remember that even if you claim the tax credit at the time of purchase, you still must meet all the other requirements—as outlined in the table above—to keep the tax credit. Otherwise, you will have to recapture the tax credit when you file your income tax return for that year—that is, repay the amount of the tax credit. This amount will be payable in full at the time of filing and will accrue interest and penalties until it is paid.

The one exception to this recapture provision is if your tax liability does not exceed the amount of the credit allowed. If your federal tax liability is, say, $5,000, you can still claim the full $7,500 tax credit by transferring it to the dealer at the point of purchase. This exception is helpful for taxpayers with lower tax liabilities but who still want to maximize the value of the federal tax credit.

The SECURE Act 2.0 was signed into law on Dec. 29, 2022. It builds on the original SECURE Act and aims to strengthen the nation’s retirement system while enhancing retirement security for individuals. It features 92 provisions, some of which went into effect this year, and others will roll out in 2024 and beyond.

For 2023, the most notable provision increased the age required to take required minimum distributions (RMDs) from 72 to 73. In addition, the penalty for failing to take an RMD dropped from 50% to 25%.

Other provisions include student loan matching, withdrawals for emergency personal expenses, expanding automatic enrollment of 401(k) plans, and much more.

Changes Effective Jan. 1, 2024

No Roth 401(k) RMDs

Assets held in a Roth-designated account of an employer retirement plan will no longer be subject to RMDs. 

Planning Opportunity: Workers looking to increase their Roth asset exposure for tax diversification purposes may benefit from contributing money to their employer plan’s designated Roth account. If they are happy with their plan’s investment options and fee structure, they can now maintain these accounts without needing to roll them over to a Roth IRA to avoid RMDs.

Surviving Spouse Treated as Employee 

Surviving spouses listed as the sole beneficiary of a worker’s employer-sponsored retirement plan can elect to be treated as the employee.

Planning Opportunity: This election allows the surviving spouse to start RMDs at the worker’s RMD age instead of their own. This is particularly relevant for older surviving spouses who can use the provision to delay RMDs until the year their younger deceased spouse would have been required to start taking distributions.

529 Plan Asset Rollover to a Roth IRA

Tax and penalty-free trustee-to-trustee rollovers will be permitted from a 529 plan to a Roth IRA for the benefit of the named 529 plan beneficiary. To qualify, the 529 plan must be open for at least 15 years, and only the contributions and earnings in the account for more than five years are eligible to be transferred to the Roth IRA.

Rollovers are restricted to the Roth IRA annual contribution amount with a lifetime maximum of $35,000 per beneficiary. It’s also worth noting that the annual income phaseouts for Roth IRA contributions do not apply to these transfers.

Planning Opportunity: For unused 529 plan balances that account owners do not plan to use for themselves, their children, or even grandchildren, an amount up to the annual Roth IRA contribution limit could be transferred to a Roth IRA for the named beneficiary over several years (until the $35,000 limit is reached) to boost assets available for retirement. Account owners could also change the beneficiary on the 529 plan to themselves and make transfers to a Roth IRA for their benefit.

Change Effective Jan. 1, 2026

Mandatory Roth Catch-Up Contributions

Currently, catch-up contributions can be made on a pre-tax or Roth basis (if the employer retirement plan allows it). Starting in 2026, employees who earned more than $145,000 in the prior year (adjusted for inflation) will only be allowed to make Roth catch-up contributions up to the allowable annual maximum.*

Employer plans are not required to offer Roth contributions. Plans that don’t have a Roth feature will need to add Roth contributions as part of their plan or eliminate the ability for employees to make catch-up contributions altogether.

Planning Opportunity: High-wage earners who are phased out of making Roth IRA contributions directly or have traditional IRA balances that make them ineligible for backdoor Roth IRA contributions may benefit from taking advantage of Roth 401(k) contributions—both regular and catch-up. It can be a simple and effective way to increase the tax diversification of their asset base and potentially lower the taxes they pay in retirement.

Aldrich Insights

The SECURE Act 2.0 provisions are complex, and we recommend discussing the provisions with your Aldrich Wealth Advisor to determine if there are any strategies you should undertake now or in the future.

* On Aug. 25, 2023, the IRS announced that it extended the implementation date of this rule from Jan. 1, 2024, to Jan. 1, 2026.

Oregonians—especially those in the Portland Metro area—pay among the highest taxes in the nation. The income tax rate for high earners in Multnomah County is 14.7%, second only to New York City. Such tax burdens have prompted many taxpayers to reconsider where they work and live.

Increased flexibility from employers and remote work opportunities make an out-of-state move more realistic. Various states went through significant shifts in their population as people migrated in 2021, with low-tax states experiencing an influx of new residents and higher population growth.

Aldrich Insights

Lowering your income tax may motivate you to change your county or state; however, you’ll want to evaluate your overall tax burden as well as the non-tax implications and benefits before making a big move. It’s essential to look at other cost-of-living expenses, including additional taxes, such as property, estate, sales, and retirement income tax.

• If you are a small business owner moving to another state, some of your income may still be taxed in your former state for the year you relocate. You should record how many days you worked in your previous state compared to your new state that year.
• If your business stayed behind in your former state, any pass-through income might still be taxed by that state.
• Research your new state’s income tax rates. Some states have a flat rate, while others use a marginal tax bracket. The nine states without an income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
• Plan to file tax returns in your new and old state for the year you moved unless you moved to a state with no income tax.
• Check your new state’s rules for establishing residency, take steps to change your residency, and limit how many days you spend in your old state.
• Some items that help establish residency include your DMV registrations, voting registrations, and locations where you are involved in civic/religious organizations.

Ultimately, your state of residency only changes if you intend to leave your old state behind and start your life in the new location.  Too many connections to your old state may cause that state to question if you actually changed your residency.

State and Local Tax + Pass-Through Entities Elective Tax 

The Tax Cuts and Jobs Act of 2017 capped the State and Local Tax (SALT) deduction at just $10,000 for individuals. Since then, many states with high individual income taxes have sought a workaround.

At the end of 2020, the IRS announced it would allow a federal deduction for pass-through entities (PTEs), which could elect to pay state taxes of the owners at the entity level. In response, 36 states, including Oregon and California, have since enacted a Pass-Through Entity Elective Tax (PEET).

The credit’s benefit is slightly more complicated for taxpayers with income from inside and outside states with PEET options. Further analysis will often be necessary to confirm the tax benefits.

How PEET Works in Oregon

Oregon’s law went into effect in 2022 and was renewed through 2025. Initially, it did not account for each entity’s estimated taxes to be paid during 2022. However, Senate Bill (SB) 1524, signed into law at the end of March 2022, now requires pass-through entities to pay estimated taxes for the Oregon PEET beginning June 15, 2022.

The actual election for the PEET occurs on a timely filed Oregon return (including extensions). If estimates are not paid by June 15, the election can still be made—the state will charge interest on the late payments. The election in Oregon includes all owners and can only be made if all owners are effectively individuals.

The ultimate result is that the entity makes a tax payment to Oregon and deducts such payment on their federal return, reducing taxable income. The owners get an Oregon tax credit for that amount and claim it on their personal returns. Any excess amount paid is fully refundable.

Aldrich Insights

The Oregon PEET may provide a tax benefit for owners receiving a K-1 from a pass-through entity, particularly if the PTE and all its owners are in Oregon. If a PTE has owners outside of Oregon, there is generally some benefit, but more analysis is required. Making the appropriate estimated tax payment before year-end allows for the most benefit.

How PEET Works in California

California’s PEET was made law under Assembly Bill 150 in 2021 and modified by SB 113. For the 2021 through 2025 taxable years, the law allows a qualified pass-through entity (PTE) to elect to pay PEET equal to 9.3% of its qualified net income. This tax decreases the federal net income included on the owners’ K-1.

The annual election for the PEET is made on a timely filed California return (including extensions). However, California requires the greater of $1,000 or 50% of the prior year’s PEET payment to be made by June 15 of the tax year to qualify for that year’s credit. Due to California disaster relief, the deadline to make the PEET estimate for the 2023 tax year has been extended to Nov. 16.

The election in California is on an owner-by-owner basis, allowing each owner to make their own decision. The credit in California is not refundable, so additional analysis is needed to confirm the benefits.

Aldrich Insights

Due to estimated tax payment requirements, California taxpayers needed to elect into the PEET effectively by June 15. Please work with your Aldrich Advisor to confirm what option is best for you in 2024 and plan now for the expected cash flow needs.

Oregon Kicker Tax Refund

Oregon taxpayers will be able to claim their portion of a state revenue surplus, a $5.61 billion kicker for the 2023 tax year—the largest amount ever returned. The kicker will be returned to taxpayers as a credit on their 2023 tax returns filed in 2024.  

For most taxpayers, this will increase the amount of their refund or decrease the amount of Oregon personal income tax they owe. The kicker is approximately 44% of the state personal income taxes Oregonians paid in 2022, about $980 for the median taxpayer: 

Rough Estimate of Kicker Returns by Income Group

* Based on 2020 actual tax returns

** Based on 2020 actual tax returns, PIT kicker amount ($5.6 billion) and the Oregon Office of Economic Analysis’s forecast tax liability

Source: Oregon Office of Economic Analysis, slide 15

Oregon’s unique kicker law requires the state to return revenue to taxpayers when the amount collected exceeds forecasts by more than 2%. These payouts come after each two-year budget cycle in the form of a credit. 

Aldrich Insights

Under Oregon’s progressive tax system, high-income earners pay more in taxes—and will thus receive a substantially higher refund. We recommend working with your Aldrich Advisor to understand how the kicker credit affects your personal tax situation. 

Paid Leave Oregon

On Sept. 3, 2023, Oregon’s paid family leave law went into effect, allowing eligible employees to take up to 12 weeks for family, medical, or safe leave. The program is funded through employer and employee contributions—up to 1% of an employee’s total gross wages and capped at $797.40 in 2023.

Employers with more than 25 employees pay 0.4%, and employees pay 0.6% of the contribution. However, employers may pay some or all of the employee portion as a benefit. Employers with fewer than 25 employees are not required to contribute, but still must collect and submit employee contributions.

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Most Oregon workers who made at least $1,000 in gross wages during the base year, or alternate base year, could be eligible. Employees apply for paid leave and file claims with either Paid Leave Oregon via Frances Online or with the administrator of their employer’s equivalent plan.

The state or private insurer—not the employer—then pays the benefit directly to the employee if their leave is approved. The table below provides an example of contributions and benefits based on an employee’s weekly earnings.

Example of Payroll Contributions

State Average Weekly Wage for 2023-24: $1,269.69

• Minimum Weekly Benefit Amount: $63.48
• Maximum Weekly Benefit Amount: $1,523.63

 Source: Paid Leave Oregon 

Employees can use this calculator to estimate their contributions but should check with their employer’s HR or benefits team for the actual amount of their paycheck deductions and for eligibility.

Washington Capital Gains Tax

In April 2021, the Washington State lawmakers passed a state capital gains tax for individuals with Washington-allocated gains. This 7% tax is charged on long-term investments above $250,000, the proceeds to fund the state’s education legacy trust and common school trust accounts.

In March 2022, Douglas County Superior Court Judge Brian Huber struck down Washington’s new capital gains tax. While supporters characterized it as an excise tax, critics called it an income tax that violated the state’s constitution.

However, in March 2023, the Washington State Supreme Court ruled the excise tax constitutional, allowing the Department of Revenue (DOR) to continue collecting the tax. The first payments for the tax year 2022 were due on or before April 18, 2023.

While short-term capital gains and ordinary income are excluded, most gains from long-term investments are subject to the 7% tax. Gains from certain assets are exempt, including depreciable assets used in a trade or business, retirement account assets, real estate, livestock sales, and timber.

Taxpayers may also deduct long-term gains from the sale of qualified family-owned small businesses. Most tax filers can deduct $250,000 of long-term capital gains before calculating their tax liability. Married couples filing separately are the only type of filer limited to a $125,000 deduction. (Thus, a single taxpayer will still have a $250,000 deduction.) Taxpayers can also receive a deduction with a charitable donation of up to $100,000 to certain charities.

Aldrich Insights

Capital gains taxes can be minimized with proper planning. Consider tax-loss harvesting by selling unprofitable investments at a loss to offset or reduce capital gains, and smoothing out capital gains over a few years so that no year has over the $250,000 gain.

As a reminder, we recommend keeping all relevant tax documents on hand for a minimum of seven years. Here’s a detailed chart with record retention best practices.

We know that you’re facing unique challenges. Our expertise can help you navigate the nuances of financial planning to help you achieve your goals. Your Aldrich Advisor is here to provide support and answer your questions. Reach out today to schedule a meeting to discuss your 2023 tax plan.

This year-end tax planning guide is based on the prevailing federal tax laws, rules, and regulations. It is subject to change, especially if Congress enacts additional tax legislation before the end of the year. Your personal circumstances will likely require careful examination.

This guide was written with the most current information as of October 2, 2023. Please continue to check back for future updates. 

Tax insights and advice included in this document may not describe all relevant facts or analysis of all relevant tax issues or authorities. This document is solely for the intended recipient’s benefit and may not be relied upon by any other person or entity.