Month: December 2023

The SECURE 2.0 Act, enacted in late 2022, is changing your retirement plan’s ability to allow catch-up contributions.

Enhanced Catch-Up Limits (2025 Onward)

One of the major updates introduced by SECURE 2.0 is the enhancement of catch-up contribution limits for individuals aged 60 to 63. Starting in 2025, the maximum catch-up contribution for employer-sponsored plans—401(k), 403(b), and 457(b)—increases to the greater of $10,000 (adjusted for inflation) or 150 percent of the 2024 regular catch-up contribution limit.

For SIMPLE IRA participants, this limit is the greater of $5,000 or 150 percent of the 2025 regular catch-up limit. This change offers a significant opportunity to bolster your retirement savings.

To be clear, these super catch-up contributions are allowed only if you reach age 60, 61, 62, or 63 during the year in question. If you are not within that age window for the year in question but are age 50 or older, the “regular” catch-up contribution maximums apply. Those maximums are $7,500 and $3,500 (SIMPLE IRA) for 2023, adjusted for inflation in future years.

Controversial Change for High-Income Participants Delayed

Another change initially set for 2024, which faced considerable backlash, has been postponed to 2026. This pertains to high-income participants (with prior-year FICA wages over $145,000, adjusted for inflation) in employer-sponsored plans. Such individuals will make catch-up contributions only to a designated Roth account.

While these contributions don’t reduce taxable wages, they do offer tax-free growth and withdrawals under qualifying conditions.

Why This Matters

The Roth account change, though now delayed, will eventually impact how high-earning individuals can make catch-up contributions. If your plan doesn’t offer a Roth option, amendments to enable these contributions might be required.

Immediate Steps

The status quo remains for 2024 and 2025, allowing standard catch-up contributions for those age 50 or over. It’s advisable to start planning for the SECURE 2.0 changes, especially if you manage a 401(k) plan for employees. Understanding these shifts and preparing in advance will help ensure smooth compliance and optimal retirement planning.

If you want to discuss these SECURE 2.0 changes, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 11, 2023

I am writing to share some important insights regarding tax-loss harvesting, a strategy that can be beneficial for managing your investments and tax obligations.

While tax-loss harvesting is often considered a year-end tactic, it’s also applicable whenever you need to offset gains, especially looking ahead to 2024.

The wash-sale rule disallows a loss from selling stock or mutual fund shares if you buy substantially identical securities within a 61-day window surrounding the sale.

For example, if you sell shares at a loss and repurchase the same or similar shares too soon, the tax code disallows your loss. The rule aims to prevent investors from claiming a tax loss while maintaining a position in the market.

Fortunately, the disallowed loss isn’t lost forever. It’s added to the tax basis of the new securities, reducing future gains or increasing future losses. But navigating this rule requires careful planning.

You could use the “double up” strategy to maintain your position in a stock while still harvesting tax losses.

Additionally, it’s important to note that the wash-sale rule currently does not apply to cryptocurrency losses, as the IRS classifies cryptocurrencies as property, not securities. This exemption offers a unique opportunity for tax-loss harvesting in the crypto market.

If you want to discuss tax-loss harvesting, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 9, 2023

Remember to consider your Section 199A deduction in your year-end tax planning. If you don’t, you could end up with an undesirable $0 for your deduction amount.

Here are three possible year-end moves that could, in the right circumstances, simultaneously (a) reduce your income taxes and (b) boost your Section 199A deduction.

First Things First

If your taxable income is above $182,100 (or $364,200 on a joint return), your type of business, wages paid, and property can increase, reduce, or eliminate your Section 199A tax deduction.

If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, which is the income that

• determines your eligibility for the Section 199A tax deduction,
• sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
• establishes when you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses your Form 1040 taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).

Strategy 3: Buy Business Assets

Thanks to Section 179 expensing, you can write off 100 percent of most property and equipment. Alternatively, you can use bonus and MACRS depreciation to write off more than 80 percent. To make this happen, you need to buy the assets and place them in service before December 31, 2023.

The big asset purchases and write-offs can help your Section 199A deduction in two ways:

1. They can reduce your taxable income and increase your Section 199A deduction when they get your taxable income under the threshold.
2. They can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases your Section 199A deduction.

The Section 199A deduction can get confusing. If you would like my help, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 7, 2023