2023 Personal Tax Guide

Navigating Through Stormy Waters!

We begin 2023 facing many challenges. The rise in inflation has caused much concern for Americans, as prices of items in nearly all sectors of the economy have increased over the past year. This has been compounded by continued supply-chain shortages, which have impacted many industries. The Federal Reserve has increased interest rates on several occasions over the past year to curb inflation, while trying not trigger a recession. The markets have been volatile as a result. After three years of the pandemic, COVID-19 is still with us, causing more than six million deaths to date world-wide. New subvariants emerge and spread. Vaccines and boosters seem to limit the worst of COVID-19, but the disease has not yet been eradicated. Meanwhile, Americans are striving to get back to pre-pandemic life, including returning to the office (although it may be a hybrid arrangement), attending large gatherings and traveling for business and pleasure.

International issues have also impacted many. It has been over a year since the invasion of Ukraine by Russian forces; the ongoing war has resulted in global disruption. The threat of terrorism (both physical and related to cybersecurity), potential trade wars and climate change remain significant issues.

Cryptocurrency continues to be popular with investors, which has in turn resulted in increased IRS interest. The 2021 Infrastructure Investments and Jobs Act (“the Infrastructure Act”) revised certain Internal Revenue Code provisions to address digital assets. Specifically, individuals and firms acting as digital asset brokers will be required to report transaction information to the IRS. In addition, business owners will be required to report any cryptocurrency payments worth more than $10,000, similar to the current requirements for cash transactions. These changes go into effect for any returns and statements required to be filed or furnished after December 31, 2023. Recently, there were unrealized losses from holdings in FTX or other “frozen” exchanges. Such losses are currently not deductible until there has been a disposition of the underlying tokens. Please see our chapter on digital assets for further discussion.

On August 9, 2022, President Biden signed into law the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (“CHIPS”). This bill allocated $52.7 billion in grants over the next five years to increase American chip manufacturing, promote the building of new semiconductor manufacturing facilities and compete with other nations in this area. This bill was designed to solve the supply chain vulnerabilities we have been experiencing. It also created a new advanced manufacturing investment credit, which is an amount equal to 25% of the qualified investment for that year in a facility for which the primary purpose is the manufacturing of semiconductors or semiconductor manufacturing equipment.

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (“IR”), a pared-down version of the Build Back Better (“BBB”) Act, which stalled in the Senate. A key provision of IR was to impose a 15% alternative minimum tax (“AMT”) on profits (before tax deductions and credits are applied) that exceed $1 billion over any consecutive taxable three-year period. This provision does not apply to private equity firms, and there are exceptions for accelerated depreciation. This provision is effective for tax years beginning after December 31, 2022. Another key provision is the allocation of over $300 billion to expand and extend existing energy-related tax credits, including tax incentives for green energy products, a $4,000 credit for purchasing used electric vehicles, and a $7,500 tax credit for purchasing new electric vehicles. There is also a provision to increase the research and development credit for qualified small businesses. IR also extends the provision to limit excess business losses for noncorporate taxpayers to $250,000 ($500,000 for joint filers) through the 2028 tax year (it was previously set to expire at the end of 2025). Finally, IR allocates approximately $80 million in IRS funding over the next nine years for taxpayer services, enforcement, business systems modernization and operations.

On December 29, 2022, President Biden signed into law the SECURE 2.0 Act (“SECURE 2.0”), a follow-up to the Setting Every Community Up for Retirement Act of 2019. SECURE 2.0 made substantial changes to qualified retirement plans and IRAs, with some provisions going into effect in 2023, and most going into effect in 2024 and later years. One of the most significant changes is the date when the required minimum distributions (“RMDs) go into effect. Prior law required RMDs to begin at age 72 except for those who had reached age 70½ prior to December 31, 2019 (those individuals had to start taking RMDs at age 70½). SECURE 2.0 extends the RMD start date to age 73 effective January 1, 2023 and to 75 starting in 2033, depending on the participant’s birth year. Effective January 1, 2023, SECURE 2.0 also reduces the excise tax for failure to take RMDs from 50% of the shortfall to 25%, and it further reduces the excise tax to 10% if the individual corrects the shortfall in a two-year correction window. SECURE 2.0 provides other changes to your retirement plans, including several that impact Roth contributions. More information can be found in the retirement plans chapter of the guide.

On the state and local tax front, the pass-through entity tax (“PTET”) has been a significant planning tool for taxpayers. The PTET allows individual business owners to take the entity-level state and local tax as a business deduction on their federal income tax returns. This circumvents the $10,000 cap on the state/local tax deduction, enacted by the Tax Cuts and Jobs Act of 2017 (“TCJA”). The rules for taking advantage of this provision are complex and differ depending on the state. The chapter on state tax issues covers these rules in depth.

As many of us have pivoted to working from home, at least on a part-time basis, cybersecurity and technology have taken on increasingly significant importance. Family offices, who typically manage the personal affairs of the family in addition to providing private wealth management services, are at an increasingly higher risk for cyberattacks. These attacks can leave the family vulnerable to extortion, fraud and identity theft. It is very important to invest in technology and put safeguards in place to deter these attacks.

Many families with wealth continue to be very concerned about their children’s and grandchildren’s future and safety, and what can be done to sustain and grow their wealth in these uncertain times. Given the impact of the pandemic and the current economic and geopolitical landscape, it is extremely important that you pay attention to your financial position so you can stay the course and achieve your financial objectives. Specific goals such as retirement planning, managing cash flow, and transferring your family’s wealth to the next generation should be top-of-mind in 2023 and beyond.

We have written this guide to help you identify opportunities to minimize tax exposure, accomplish your financial goals and preserve your family’s wealth. This guide includes all major tax law changes through February 15, 2023. The best way to use this guide is to identify areas that may be most pertinent to your unique situation and then discuss the matter with your tax advisor. It is especially important that you check in with your tax advisor before proceeding with any tax planning transactions this year. As always, our tax professionals will be pleased to discuss any opportunities that might apply to your personal situation and help you and your family navigate through stormy waters as you move forward with your financial objectives.

Marie Arrigo, MBA, CPA
Tax Partner
Leader, Family Office Tax Services
Leader, Not-for-Profit Tax Services
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