Week of June 19, 2023

Earlier this year, some absolutely massive changes came out of Washington that will impact pretty much business owner that is either planning to or is already saving for "retirement" (whatever that is, right?) in tax-advantages accounts. So much so, in fact, that instead of three topics in this week's tl;dr, we will just focus on two.

SECURE 2.0

This might seem like "old" news, since it passed at the end of 2022, but as we continue to converse with our patrons about finalizing 2022 taxes over the next couple months, we thought a refresher on the items addressed in SECURE 2.0, as they will affect almost every "retirement saver" in the country, and more specifically, business owners looking to roll out savings plans for their teams.

RMD AGE ADJUSTED UPWARDS, MORE TO COME

Gone is the "magic" Required Minimum Distribution ("RMD") age of 70.5; previously, the minimum age was increased to 72, and now the SECURE 2.0 Act has driven the requirement even higher; starting the first of this year, the RMD age has gone up to 73... and it will continue to click up as longevity and work-life increase - until December 31, 2032 when anyone who turns 74 following that date does not need to start withdrawing from personal retirement accounts (like IRAs) until they hit age 75.

QUALIFIED CHARITABLE TRANSACTIONS

Qualified Charitable Donations (directly from an IRA or similar qualified plan to a qualified charity) were updated to increase annually with inflation, from the 2022 $100,000 baseline; important to remember, Donor Advised Funds and Private Foundations are NOT qualified charities as respects these donations. Additionally, SECURE 2.0 allows for the creation of a new Split-Interest entity with up to $50,000 of qualified funds; think Charitable Gift Annuities or Charitable Remainder Annuity and Unitrusts (CRAT/CRUT). While the dollar amounts are relatively small, the creative thinking is welcomed for savers who need creative ways to distribute wealth out of tax-inefficient IRAs.

QLAC, QLAC

No, it's not the Aflac duck you hear - SECURE 2.0 kicked off some potentially interesting increased limits on the Qualified Longevity Annuity Contract or "QLAC". First rolled out in 2014, these nifty contracts allow anyone with a qualified retirement plan (think 401(k), 403(b), IRA, etc.) to use some or all of their plan, up to a limit - which increased from $145,000 to $200,000 with SECURE 2.0. A QLAC funds an annuity contract to generate guaranteed income later in life (as late as age 85) - which allows retirees to push RMD requirements further down the road as well because the QLAC is exempt from the RMD rules.

NEW AUTOMATIC ENROLLMENT - Employer Sponsored Plans

Starting in 2025, the SECURE 2.0 will require employers to AUTOMATICALLY ENROLL ELIGIBLE EMPLOYEES in their already established 401(k) and 403(b) plans, with a contribution of no less than 3% of pay and no more than 10%. An important note here; the required contribution will ramp up to the tune of 1% a year until the "minimum" enrollment for employees is 10% and the "maximum" is 15%.

Existing plans are grandfathered in, and employees can, of course, opt out of the automatic enrollment, and businesses with less than 10 employees or those that have been around for less than three (3) years are exempt from the auto-enrollment.

CATCH UP CONTRIBUTIONS - COMING SOON

Starting January 1, 2024 catch-up contributions for savers over 50 (with new rules for some savers over 60) in most tax-favored retirement plans; IRAs, 401(k)s, 403(b)s, 457, SIMPLE IRAs and other will start to see the amount they can contribute rise, in some cases significantly, creating additional opportunities for pre-tax savings.

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The impact of Property Taxes on the Business Tax Climate Index

This week, our friends over at the Tax Foundation have some analysis on the impact of Real Property taxes across the country; keep in mind, their data includes both the "Property Tax" we all think about - the kind that we get a bill from the County Assessor for - as well as taxes on personal property/net worth and asset transfer taxes.

For businesses, in addition to Commercial and Industrial properties often shouldering a higher effective rate on Real Estate taxes, those non-Real Estate taxes mentioned above are potentially very important, simply due to the sheer volume of tangible "personalty" (or personal property, as defined by the IRC. That would include things like machinery, equipment, office furniture, as well as intangibles like Goodwill and intellectual property (i.e., trademarks).

Ironically, everyone's perennial tax-punching bag, California, comes in at a respectable #19 this year (#1 is best, #50 is worst)... surprising, given much of the press we hear about California's tax structure (the state ranks #49 on the Individual Income Tax component of the analysis and #47 on the Sales Tax component).

Surprisingly (or not - states have to generate income somehow, right?) - some of our favorite and fast growing "low tax" havens score very poorly here - as do most of the northeastern states excepting Delaware.

That said, Texas, Tennessee, Colorado, Wyoming and South Carolina - all members of the previously mentioned "favorites" list, all rank in the bottom half of the list when it comes to taxes on personal and real property...