Midyear Planning

Jun 6, 2023

By Judy Mason, CPA, CVA – Partner and Marco Loza, CPA – Manager

As we approach the midpoint of the year 2023, it is the perfect time to assess your tax situation and explore strategies to optimize your financial position. Midyear tax planning enables individuals and businesses to proactively manage their tax obligations, identify potential savings, and make informed decisions for the remainder of the year. In this article, we will discuss key considerations and actionable tips for effective 2023 midyear tax planning.

A Starting Point – Review Your Withholding and Estimated Tax Payments:

A good starting point for your 2023 midyear planning is your 2022 tax return. Did you owe money to the IRS or a state, or did you receive a big refund? If you answered “yes” to this question, you may want to assess whether your current withholding and estimated tax payments align with your projected tax liability for the year. Furthermore, if you’ve had significant life changes such as marriage, divorce, the birth of a child, or change in employment, it’s crucial to update your W-4 form with your employer. Adjusting your withholdings or making additional estimated tax payments can ensure that you are paying the appropriate amount of taxes throughout the year to avoid any potential underpayment penalties.


Deferring Receipt of Income Until 2024

If you expect your adjusted gross income (AGI) to be higher in 2023 than in 2024 or anticipate being in the same or a higher tax bracket in 2023, you may benefit by deferring the receipt of income until 2024. Common methods of deferring income include delaying the receipt of payments, negotiating the timing of bonuses or commissions, and postponing the sale of assets with potential gains.

Accelerating the Receipt of Income into 2023

Conversely, if you anticipate being in a higher tax bracket in 2024 than in 2023 or need additional income in 2023 to take advantage of an offsetting deduction or credit that will not be available in future tax years, it may make sense to accelerate the receipt of income into 2023.

Investment Income

The timing of your investment activities can have a significant impact on your tax position. For example, capital gains on property and securities held for less than one year are taxed at an individual’s ordinary income tax rate. Whereas, capital gains on property and securities held for more than one year are taxed at more favorable capital gains tax rates. Using this concept to time the harvest of capital gains while keeping in mind any capital loss carryovers from your 2022 return can help you minimize your taxable gains and reduce your overall tax liability. To avoid recognizing capital gains altogether, you should consider donating appreciated property to charity rather than selling it. We discuss optimal timing for charitable contributions under the Itemized Deductions Planning section.

Defer Taxes on Gains by Investing in Qualified Opportunity Funds (QOFs)

Taxpayers who invest in Qualified Opportunity Zone property through a QOF can temporarily defer tax on the amount of eligible gains they invest. In some cases, taxpayers can permanently exclude 10% or 15% of invested eligible gains. The taxpayer must make the investment in a QOF within 180 days of realizing a qualified gain, which includes both capital gains and qualified 1231 gains. You can defer tax on eligible gains you invest in a QOF until you have an “inclusion event” or by December 31, 2026, whichever is earlier.

Itemized Deduction Planning

When filing your taxes, you have the option to claim the standard deduction or itemize your deductions, whichever provides a greater tax benefit. For 2023, the standard deduction is set at $27,700 for joint filers and $13,850 for single filers. Bunching itemized deductions is a tax strategy that aims to optimize your tax situation by strategically concentrating itemizable deductions into specific years, thereby exceeding the standard deduction threshold and allowing you to itemize. For example, consider doubling up on charitable contributions every other year instead of making donations each year.

Home Energy Tax Credits

Taxpayers can claim either the Energy Efficient Home Improvement Credit (EEHIC) or the Residential Energy Clean Property Credit (ECPC) in the year qualified improvements are made. Some qualified improvements for the EEHIC include exterior doors, windows, skylights, central air conditioners, water heaters, and furnaces. For 2023 the amount of credit you can take under the EEHIC is 30% of the total improvement expenses, up to a maximum of $1,200. Some qualified improvements for the ECPC include solar, wind, and geothermal power generation; solar water heaters; and battery storage. The amount of credit you can take under the ECPC is 30% of the total improvement expenses.

American Opportunity and Lifetime Learning Tax Credits for Education

The American Opportunity Tax Credit (AOTC) is available for qualified tuition and fees paid on behalf of a student (i.e., you, your spouse, or a dependent) who is enrolled on at least a half-time basis. The maximum credit is $2,500 and is available for the first four years of the student’s post-secondary education. The Lifetime Learning Credit (LLC) is available for qualified tuition and related expenses paid for eligible students enrolled in an eligible educational institution. This credit can help pay for undergraduate, graduate, and professional degree courses along with courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit. For 2023, the maximum credit is $2,000. Both credits phase out at modified AGI levels between $160,000 and $180,000 for married filing joint taxpayers and, between $80,000 and $90,000 for single taxpayers. Tax planning for these credits can create eligibility for family members with lower income.

Contributions to 529 Plans

A 529 Plan allows you to save for future education expenses in a tax-advantaged savings plan. These plans generally are available in the form of a prepaid tuition plan or a more traditional investment account that grows tax-deferred if used for qualified education expenses. Besides college expenses, 529 distributions may be made tax-free for elementary and secondary tuition of up to $10,000 per year per student. They can also be used to pay up to $10,000 of student loans per beneficiary. Up to $17,000 in contributions to a 529 Plan are free from federal gift taxation ($34,000 if gift-splitting with a spouse). Under a special rule, you can “front-load” five years’ worth of annual gift tax exclusions and make up to an $85,000 contribution per beneficiary in 2023 ($170,000 if gift-splitting with a spouse). Illinois allows a deduction of $10,000 for single taxpayers ($20,000 for joint filers) for contributions to the state’s Bright Start and College Illinois plans. Starting in 2024, a new provision of the Secure Act 2.0 will allow up to a lifetime total of $35,000 to be rolled over from a 529 Plan to a Roth IRA established in the name of the beneficiary.


401K Plans

The 401K elective deferral limit is $22,500 for 2023 plus $6,500 catch-up contributions if you reach age 50 by December 31. If you are not contributing the maximum amount permitted to your 401K account, you still have time to increase contributions for the remainder of the year.

Traditional IRA

If you are not an active participant in an employer retirement plan you may make deductible contributions to an IRA. The deadline for 2023 contributions is April 15, 2024. The annual deductible contribution limit for an IRA for 2023 is $6,500 plus a $1,000 catch-up contribution for taxpayers age 50 or older by the close of 2023.

Roth IRA

This type of IRA allows you to make nondeductible contributions of up to $6,500 ($7,500 if making an eligible catch-up contribution) for 2023. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the contribution and the individual has reached age 59½. The maximum contribution for 2023 is phased out for persons with an AGI from $218,000 to $228,000 for married taxpayers filing jointly, and $138,000 to $153,000 for single taxpayers.

Roth IRA Conversions

Funds in a traditional IRA (including SEPs and SIMPLE IRAs), Section 401(a) qualified retirement plan, Section 403(b) tax-sheltered annuity, or Section 457 government plan may be rolled over into a Roth IRA. No penalties will apply if all the requirements for such a transfer are satisfied.

Required Minimum Distributions

If you are turning 73 in 2023 and taking your first RMD, you have until April 1, 2024, to do so. For each subsequent year, your RMD must be taken by December 31. Keep in mind, if you delay your initial RMD until April 1, 2024, you will have two RMD withdrawals for 2024.

IRA Donations to Charity

If you are 70½, you can make direct contributions from your IRA to charity of up to $100,000 during 2023, but you can’t claim a charitable contribution deduction. Conversely, the amounts are not included in your taxable income and can be used to satisfy your RMD.


20% Qualified Business Income Deduction

A hallmark provision of the Tax Cuts and Jobs Act (TCJA), section 199A provides for a 20% deduction for “qualified business income” and certain other types of income. The deduction is available to individuals, estates, and trusts. As with other provisions that came out of the TCJA, this deduction is set to expire for tax years beginning after December 31, 2025. Proper planning, including contributions to retirement plans, can help maximize this deduction for its remaining years.

Reevaluate Your Retirement Planning

Consider evaluating your company’s retirement plan. Does it provide the owners with an opportunity to maximize contributions? Do employees participate in the plan? Should changes be considered to increase employee participation and possibly improve employee retention? Illinois requires businesses that do not sponsor a retirement plan and have more than five eligible employees to enroll in the state-sponsored Illinois Secure Choice Plan.

Pass-through Entity Tax

Many states including Illinois have enacted a pass-through entity tax provision. This allows your business to elect to pay your personal state income tax on your behalf which provides a 100% deduction of the tax and avoids the $10,000 state and local income tax itemized deduction limit on your return.

Depreciation and Section 179 Expense Election

The 179 election allows your business to expense the entire cost of equipment placed in service during the year. For 2023, the maximum deduction is $1,160,000 (with a phase-out beginning at $2,890,000 assets placed in service).

Bonus Depreciation

Business or investment property placed in service in 2023, including certain used property, may be eligible for an 80% bonus depreciation deduction. Notably, Illinois no longer conforms with the federal bonus depreciation regulations, so if your business is located in Illinois consider Section 179 expensing instead of bonus deprecation.

Employee Retention Credit

The ERTC is a refundable credit that businesses impacted by the pandemic can claim on qualified wages. As a business owner you have probably received many offers from companies willing to assist you with obtaining the credit. The IRS has issued warnings about some of the aggressive tactics being used by some of these entities. Our experts can assess your business to determine if your company is eligible for this credit and provide you with the information needed to support your claim.

Midyear tax planning is an essential practice for individuals seeking to optimize their tax situation and make informed financial decisions. MichaelSilver’s team of trusted advisors is ready to help. Our goal is to increase your awareness of tax planning opportunities and potential moves to make to minimize your tax liability. Please don’t hesitate to contact us if you want more details about any of the topics discussed or just have questions or concerns.

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