Author: Leon Clinton

When you take advantage of the tax code’s offset game, your stock market portfolio can represent a little gold mine of opportunities to reduce your 2023 income taxes.

The tax code contains the basic rules for this game, and once you know the rules, you can apply the correct strategies.

Here’s the basic gist:

• Avoid the high taxes (up to 40.8 percent) on short-term capital gains and ordinary income.
• Lower the taxes to zero—or if you can’t do that, lower them to 23.8 percent or less by making the profits subject to long-term capital gains.

Think of this: you are paying taxes at a 71.4 percent higher rate when you pay at 40.8 percent rather than the tax-favored 23.8 percent.

To avoid higher rates, here are seven possible tax planning strategies.

Strategy 1

Examine your portfolio for stocks you want to unload, and make sales where you offset short-term gains subject to a high tax rate, such as 40.8 percent, with long-term losses (up to 23.8 percent).

In other words, make the high taxes disappear by offsetting them with low-taxed losses, and pocket the difference.

Strategy 2

Use long-term losses to create the $3,000 deduction allowed against ordinary income.

Again, you are trying to use the 23.8 percent loss to kill a 40.8 percent rate of tax (or a 0 percent loss to kill a 12 percent tax, if you are in the 12 percent or lower tax bracket).

Strategy 3

As an individual investor, avoid the wash-sale loss rule.

Under the wash-sale loss rule, if you sell a stock or other security and then purchase substantially identical stock or securities within 30 days before or after the date of sale, you don’t recognize your loss on that sale. Instead, the tax code makes you add the loss amount to the basis of your new stock.

If you want to use the loss in 2023, you’ll have to sell the stock and sit on your hands for more than 30 days before repurchasing that stock.

Strategy 4

If you have lots of capital losses or capital loss carryovers and the $3,000 allowance is looking extra tiny, sell additional stocks, rental properties, and other assets to create offsetting capital gains.

If you sell stocks to purge the capital losses, you can immediately repurchase the stock after you sell it—there’s no wash-sale “gain” rule.

Strategy 5

Do you give money to your parents to assist them with their retirement or living expenses? How about children (specifically, children not subject to the kiddie tax)?

If so, consider giving appreciated stock to your parents and your non-kiddie-tax children. Why? If the parents or children are in lower tax brackets than you are, you get a bigger bang for your buck by

• gifting them stock,
• having them sell the stock, and then
• having them pay taxes on the stock sale at their lower tax rates.

Strategy 6

If you are going to donate to a charity, consider appreciated stock rather than cash, because a donation of appreciated stock gives you more tax benefit.

It works like this:

• Benefit 1. You deduct the fair market value of the stock as a charitable donation.
• Benefit 2. You don’t pay any of the taxes you would have had to pay if you sold the stock.

Example. You bought a publicly traded stock for $1,000, and it’s now worth $11,000. If you give it to a 501(c)(3) charity, the following happens:

• You get a tax deduction for $11,000.
• You pay no taxes on the $10,000 profit.

Two rules to know:

1. Your deductions for donating appreciated stocks to 501(c)(3) organizations may not exceed 30 percent of your adjusted gross income.
2. If your publicly traded stock donation exceeds the 30 percent, no problem. Tax law allows you to carry forward the excess until used, for up to five years.

Strategy 7

If you could sell a publicly traded stock at a loss, do not give that loss-deduction stock to a 501(c)(3) charity. Why? If you sell the stock, you have a tax loss that you can deduct. If you give the stock to a charity, you get no deduction for the loss—in other words, you can just kiss that tax-reducing loss goodbye.

These stock strategies have a long history in tax planning. If you need my help with any of them, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 1, 2023

The clock continues to tick. Your retirement is one year closer.

You have time before December 31 to take steps that will help you fund the retirement you desire. Here are five things to consider.

1. Establish Your 2023 Retirement Plan

First, a question: Do you have your (or your corporation’s) retirement plan in place? 

If not, and if you have some cash you can put into a retirement plan, get busy and put that retirement plan in place so you can obtain a tax deduction for 2023.

For most defined contribution plans, such as 401(k) plans, you (the owner-employee) are both an employee and the employer, whether you operate as a corporation or as a sole proprietorship. And that’s good because you can make both the employer and the employee contributions, allowing you to put a good chunk of money away.

2. Claim the New, Improved Retirement Plan Start-Up Tax Credit of up to $15,000

By establishing a new qualified retirement plan (such as a profit-sharing plan, 401(k) plan, or defined benefit pension plan), a SIMPLE IRA plan, or a SEP, you can qualify for a non-refundable tax credit that’s the greater of

• $500 or
• the lesser of (a) $250 multiplied by the number of your non-highly compensated employees who are eligible to participate in the plan, or (b) $5,000.

The law bases your credit on your “qualified start-up costs.” For the retirement start-up credit, your qualified start-up costs are the ordinary and necessary expenses you pay or incur in connection with

• the establishment or administration of the plan, and
• the retirement-related education of employees for such plan.

3. Claim the New 2023 Small Employer Pension Contribution Tax Credit (up to $3,500 per Employee)

The SECURE 2.0 passed in 2022 added an additional credit for your employer retirement plan contributions on behalf of your employees. The new up-to-$1,000-per-employee tax credit begins with the plan start date.

The new credit is effective for 2023 and later.

Exception. The new $1,000 credit is not available for employer contributions to a defined benefit plan or elective deferrals under Section 402(g)(3).

In the year you establish the plan, you qualify for a credit of up to 100 percent of your employer contribution, limited to $1,000 per employee. In subsequent years, the dollar limit remains at $1,000 per employee, but your credit is limited to:

• 100 percent in year 2
• 75 percent in year 3
• 50 percent in year 4
• 25 percent in year 5
• No credit in year 6 and beyond

Example. You establish your retirement plan this year and contribute $1,000 to each of your 30 employees’ retirement. You earn a tax credit of $30,000 ($1,000 x 30).

If you have between 51 and 100 employees, you reduce your credit by 2 percent per employee in this range. With more than 100 employees, your credit is zero.

Also, you earn no credit for employees with 2023 wages in excess of $100,000. In future years, the $100,000 will be adjusted for inflation.

4. Claim the New Automatic Enrollment $500 Tax Credit for Each of Three Years ($1,500 Total)

The first SECURE Act added a non-refundable credit of $500 per year for up to three years, beginning with the first taxable year (2020 or later) in which you, as an eligible small employer, include an automatic contribution arrangement in a 401(k) or SIMPLE plan.

The new $500 auto-contribution tax credit is in addition to the start-up credit and can apply to both newly created and existing retirement plans. Further, you don’t have to spend any money to trigger the credit. You just need to add the auto-enrollment feature (which does contain a provision that allows employees to opt out).

5. Convert to a Roth IRA

Consider converting your 401(k) or traditional IRA to a Roth IRA.

You first need to answer this question: How much tax will you have to pay to convert your existing plan to a Roth IRA? With this answer, you now know how much cash you need on hand to pay the extra taxes caused by the conversion to a Roth IRA.

Here are four reasons you should consider converting your retirement plan to a Roth IRA:

1. You can withdraw the monies you put into your Roth IRA (the contributions) at any time, both tax-free and penalty-free, because you invested previously taxed money into the Roth account.
2. You can withdraw the money you converted from the traditional plan to the Roth IRA at any time, tax-free. (But if you make that conversion withdrawal within five years of the conversion, you pay a 10 percent penalty. Each conversion has its own five-year period.)
3. When you have your money in a Roth IRA, you pay no tax on qualified withdrawals (earnings), which are distributions taken after age 59 1/2, provided you’ve had your Roth IRA open for at least five years.
4. Unlike with the traditional IRA, you don’t have to receive required minimum distributions from a Roth IRA when you reach age 72—or to put this another way, you can keep your Roth IRA intact and earning money until you die. (After your death, the Roth IRA can continue to earn money, but someone else will be making the investment decisions and enjoying your cash.)

If you would like my help with any of the above, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 29, 2023

Here’s a brief review of the significant changes and updates related to the Employee Retention Credit (ERC).

Background and Evolution

Originally established under the CARES Act in March 2020, the ERC has experienced numerous transformations. Initially, businesses had to choose between claiming the ERC and taking out a forgivable loan under the Paycheck Protection Program (PPP)—a restriction retroactively changed in December 2020 through the Consolidated Appropriations Act, 2021 (CAA).

The CAA not only retroactively allowed the 2020 ERC for those who opted for PPP but also expanded the ERC’s availability into the first two quarters of 2021 and increased its value.

Changes and Challenges

Several subsequent IRS notices and congressional acts, including the American Rescue Plan Act of 2021 (ARPA), further extended and enhanced the ERC.

But then, sadly, the Infrastructure Investment and Jobs Act enacted in November 2021 retroactively removed the ERC for the fourth quarter of 2021, causing potential complications for businesses that had already processed their claims.

Professional Responsibility and IRS Warnings

Recent communications from the IRS highlight the crucial role of tax professionals in ensuring ERC compliance.

A March 7, 2023, notice reminded practitioners of their Circular 230 responsibilities, underscoring the need for diligence in evaluating ERC eligibility and compliance—even for claims not prepared by the practitioner. Further, the IRS’s inclusion of the ERC in its Dirty Dozen list on March 20, 2023, signals increased scrutiny of ERC claims and emphasizes the potential risks of scams and improper claims.

Maximizing Benefits While Minimizing Risks

Despite these challenges and increased scrutiny, the ERC remains a valuable opportunity for eligible businesses, offering up to $26,000 per qualifying employee. It is crucial for employers to thoroughly assess their eligibility, maintain robust documentation, and seek professional guidance to navigate the complexities of ERC claims.

We are here to assist you in evaluating your eligibility, ensuring compliance, and maximizing your benefits under the ERC. Our team is well versed in the latest developments and stands ready to provide the guidance and support you need. If you would like to discuss the ERC, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• November 27, 2023