Divided We Stand
While the final votes are still to be confirmed and we are looking at a Senatorial run-off in Georgia, most projections are pointing towards a divided DC. The Republicans are on track to regain control of the House while the Democrats will retain their small margin in the Senate. This means that it will be nearly impossible to pass any meaningful tax legislation over the next two years with a divided Congress. (If you forgot how legislation works, check out the Schoolhouse Rock classic. “I’m Just a Bill”.
SMALL TAX PROVISIONS
Now that the Democrats know that they will struggle to pass any new tax provisions starting in 2023, they may try to squeze a few through in the lame duck session (the last legislative session of 2022). Here are some things they may try to get passed before the ball drops in Times Square:
Extension of the expanded Child Tax Credit that you may have received in 2020 and 2021. Note - This would be good news and a few thousand less in taxes if you have children and make less than $400,000 as a married couple.
Restoring the ability to write-off research costs in the year they are incurred. Note - Not that useful in your practice but if you have that great next equipment idea, you could be able to expense your research costs in Year 1 to offset practice income.
Further increase of tax subsidies for retirement savings. Note - rather than fix SS, Congress is giving companies more incentives to offer larger retirement benefit plans. Great for your practice as the tax benefits can sometimes outweigh the cost of your 401k administration costs. Plus you get to save towards your financial freedom.
LONG TERM TAX PLANNING
If we assume that no larger tax legislation will pass with the divided Congress, we can do a better job of tax planning over the next three years. Here are some multi-year tax planning ideas for you:
Bunch your charitable deductions. With the expanded standard deduction and the limit on state and local taxes, you can save thousands by lumping your charitable giving into one year with itemized deductions and taking the taking the standard in the other years. This strategy takes some cash flow and planning but can reap big rewards.
The lower tax rates will likely be remain in place until the TCJA expires at the end of 2025 so:
taking deductions now (ie - accelerated depreciation on longer term assets) that could be stretched into 2026 and beyond will actually cost you more in tax.
generating income now (ie - ROTH conversions) that will be taxed at these lower rates now instead of waiting until after 2025 will save you tax dollars in the long run.
Speaking of ROTHs, it is always a good idea to have your funds in tax diversified buckets. If you have a pretax account like a traditional 401k, an after-tax ROTH account and a liquid but taxable brokerage account, you have the ability to allocate funds to each as appropriate for your level of income in a specific year. This diversification is also incredibly helpful in retirement to manage your tax retirement tax bill.
Finally, the threshold for the Federal Estate tax is almost $13 million per person in 2023 but scheduled to drop to half of that amount in 2026. So if you have close to $13 million, you might plan on dying before the end of 2025. Or a better idea would be to consider some estate planning like annual gifting to reduce the value of the estate.
As always, just a reminder that everybody’s tax situation is different so consult with your tax advisors to see if these strategies might work for you.