With many pandemic-era programs expiring, inflation adjustments and new legislation going into effect, many investors are left wondering what changes they might see on their tax returns this year. Here are some tax considerations that individuals and their financial professionals should keep in mind this year.
Retirement Contribution Changes
While most of us are accustomed to contribution limits increasing every few years, there were additional pieces of legislation that could impact investment planning this tax year. Inflation adjustments increased the contribution limit up to $6,500 to the Traditional IRA, up from $6,000 in 2022, investors over age 50 can contribute an additional $1,000 for a total of $7,500. This limit applies to the aggregate contributions across Traditional and Roth accounts, but does not affect an employer retirement plan. While investors can certainly max out both IRA and employer plans, it is important to remember that there are income limits that can affect whether Traditional IRA contributions are tax deductible.
Additionally, there have been changes to the Required Minimum Distribution (RMD) age. Established in the Employee Retirement Income Security Act of 1974, Required Minimum Distributions were intended to force taxation on never taxed assets and was set at age 70.5, where it remained for the next 45 years during which time the population began to live and work much longer. Effects of the COVID-19 pandemic forced policy makers to take a long look at many provisions of the regulations around retirement plans and increase the RMD beginning age to 72 for 2020, 73 in 2023, and to 75, starting in 2033.
In past years, once an investor reached the age where they have Required Minimum Distributions, they were no longer eligible to make Contributions to their IRA, regardless of earned income status. This affected many older workers who found themselves forced to take RMDs and unable to continue to save for retirement. For tax years 2020 and later, there are no age limits on IRA Contributions as long as either the taxpayer or their spouse has earned income equal to or greater than the contribution amount they are contributing in that tax year. Another advantage to investors is an inflation adjustment applied to the income limits which determine if a Traditional IRA Contribution is deductible and eligibility for Roth IRA Contributions.
Investors with access to employer retirement plans will also notice an increase to the employee contribution limits in their plans to $22,500 up from $20,500 in 2022 with an additional $7,500 catch up for those age 50 and older.
Long Term Capital Gains Taxes
While the stock market produced negative returns in 2022, many investors are still surprised to have to contend with Capital Gains. The good news is that while the capital gains tax rates have not changed, the income ceilings for qualifying for those brackets have been adjusted for inflation. Married couples with taxable income less than $83,350 in 2022 and $89,250 in 2023 have a capital gains tax rate of 0%. Many taxpayers may fall into the 15% long term capital gains tax bracket, which for 2023 includes all married couples with taxable income less than $553,850.
Unused College Savings Plans
Another change that went into effect is that unused 529 Plan balances can now be converted into Roth IRAs if they meet the requirements with the signing of the Secure Act 2.0. This has come as a welcome change for many parents who worry about what will happen with significant contributions made to college savings plans and not needed for higher education. While investors have always had the opportunity to change plan beneficiaries, take the assets as a non-qualified and taxable withdrawal, or use them to make student loan payments, the ability to roll the funds into a Roth IRA gives additional flexibility for parents who are looking to invest in their children’s future.
If you’re feeling overwhelmed by your tax situation and all of this year’s changes, the best course of action is to use your 2021 tax return to make a list of the documents you received last year and gather those same documents and make an appointment to meet with a tax professional who can work together with your financial advisor to help optimize your tax strategy.
-Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information can be obtained by calling your financial advisor. Read it carefully before you invest.
-The availability of such tax or other benefits may be conditioned on meeting certain requirements. This is for informational purposes only and is subject to change. Information has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed.
-This information is made available with the understanding that Wells Fargo Advisors Financial Network and its affiliates are not engaged in rendering legal, accounting or tax advice.
-Traditional IRA Distributions are taxed as ordinary income. Qualified Roth IRA Distributions are federally tax-free provided it has been more than five years since the Roth IRA was funded AND the owner is at least age 59 ½ or disabled, or using the first time homebuyer exception or taken by their beneficiaries due to their death. Qualified Roth IRA Distributions are not subject to state and local taxation in most states. Distributions from Traditional and Roth IRAs may be subject to an IRA 10% additional tax if distributions are taken prior to age 59 ½.
-Qualified Roth IRA Distributions are not included in gross income. Roth IRA Distributions are generally considered “qualified” provided a Roth IRA has been open for more than 5 years and the owner has reached age 59 ½ or meets other requirements. Withdrawals may be subject to an RIA 10% additional tax for early or pre-59 ½ distributions.
-Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Wyatt Wealth Management is a separate entity from WFAFN. Wells Fargo Advisors Financial Network is not a legal or tax advisor.
Courtney Phelps is a Financial Advisor who works with a dedicated team who founded their new practice, Wyatt Wealth Management, in 2021 after serving the community for decades under Wells Fargo Advisors. After seeing the gap in financial services towards women, LGBTQ families, and people of color, Courtney has dedicated herself to achieving equity in the services she provides and is a tireless advocate of LGBT causes, volunteering with the Pride Community Center in Bryan.
