As another year ends with interest rates and markets in flux, one thing remains certain: Reducing your company’s tax bill can improve your cash flow and your bottom line. Below are five strategies — including some tried-and-true and others particularly timely — that you can execute before the turn of the new year to minimize your company’s tax liability.

1. Take advantage of the pass-through entity (PTE) tax deduction, if available

The Tax Cuts and Jobs Act (TCJA) imposed a $10,000 limit on the federal income tax deduction for state and local taxes (SALT). In response, more than 30 states have enacted some type of “workaround” to provide relief to PTE owners who pay individual income tax on their share of their business’ income.

While PTE tax deductions vary by state, they generally allow partnerships, limited liability companies and S corporations to pay a mandatory or elective entity-level state tax on business income with an offsetting owner-level benefit. The benefit typically is a full or partial tax credit, deduction or exclusion that owners can apply to their individual state income tax. The business can claim an IRC Section 164 business expense deduction for the full amount of its payment of the tax, as the SALT limit doesn’t apply to businesses.

2. Establish a cash balance retirement plan

Cash balance retirement plans are regaining popularity for businesses with high earners who regularly max out their 401(k) plans. The plans combine the higher contribution limits of defined contribution plans with the higher maximum benefits and deduction limits of defined benefit plans. A business can claim much larger deductions for cash balance contributions than 401(k) contributions.

In 2023, for example, the maximum employer/employee 401(k) contribution for a 55-year-old is $73,500 (including a catch-up contribution of $7,500). Meanwhile, a business can contribute up to $265,000 to a cash balance plan (depending on the participant’s age), in addition to the 401(k) plan contribution. Contribution limits increase with age, creating a valuable opportunity for those nearing retirement to add to their retirement savings as well as a substantial deduction for the business.

Under the original SECURE Act, businesses have until their federal filing deadline (including extensions) to launch a cash balance plan. But it can take some time to prepare the necessary documents, calculate the contributions and handle other administrative tasks, so you’d be wise to get the ball rolling sooner rather than later.

3. Take action on asset purchases

Timing your asset purchases so you can place the items “in service” before year-end has long been a viable method of reducing your taxes. However, now there’s a ticking clock to consider. That’s because the TCJA reduces 100% first-year bonus depreciation by 20% each tax year, until it vanishes in 2027 (absent congressional action). The deduction has already dropped to 80% for 2023.

First-year bonus depreciation is available for computer systems, software, vehicles, machinery, equipment, office furniture and qualified improvement property (generally, certain improvements to nonresidential property, including roofs, HVAC, fire protection and alarm systems, and security systems).

Usually, though, it’s advisable to first apply the IRC Section 179 expensing election to asset purchases. Sec. 179 allows you to deduct 100% of the purchase price of new and used eligible assets. Eligible assets include machinery, office and computer equipment, software, certain business vehicles, and qualified improvement property.

The maximum Sec. 179 “deduction” for 2023 is $1.16 million. It begins phasing out on a dollar-for-dollar basis when a business’s qualifying property purchases exceed $2.89 million. The maximum deduction is limited to the amount of your income from business activity, but you can carry forward unused amounts indefinitely or claim the excess amounts as bonus depreciation, which is subject to no limits or phaseouts. (Note: If financing asset purchases, consider the impact of high interest rates in addition to the potential tax savings.)

4. Maximize the qualified business income (QBI) deduction

One caveat regarding depreciation deductions is that they can reduce the QBI deduction for PTE owners. (Note that the QBI deduction is scheduled to expire after 2025 absent congressional action.) If the QBI deduction is allowed to expire, PTE income could be subject to rates as high as 39.6% if current rates also expire.

For now, though, PTE owners can deduct up to 20% of their QBI, subject to certain limitations based on W-2 wages paid, the unadjusted basis of qualified property and taxable income. Accelerated depreciation reduces your QBI (in addition to certain other tax breaks that depend on taxable income) and thus your deduction.

On the other hand, you can increase the deduction by increasing W-2 wages or purchasing qualified property. In addition, you can bypass income limits on the QBI deduction by timing your income and deductions (see below).

5. Timing income and expenses

With the election looming next November, it’s unlikely that 2024 will see significant changes to the tax laws. As a result, the perennial tactic of timing income and expenses is worth pursuing if you use cash-basis accounting.

For example, if you don’t expect to land in a higher tax bracket next year, you can push income into 2024 and accelerate expenses into 2023. As discussed above, though, you could end up with a smaller QBI deduction.

A tangled web

Seemingly small tax decisions may have costly unintended consequences under different tax provisions. We can help your business make the right year-end tax planning moves.

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The IRS recently issued its 2024 cost-of-living adjustments for more than 60 tax provisions. With inflation moderating slightly this year over last, many amounts will increase over 2023 amounts but not as much as in the previous year. As you implement 2023 year-end tax planning strategies, be sure to take these 2024 adjustments into account.

Also, keep in mind that under the Tax Cuts and Jobs Act (TCJA), annual inflation adjustments are calculated using the chained consumer price index (also known as C-CPI-U). This increases tax bracket thresholds, the standard deduction, certain exemptions and other figures at a slower rate than was the case with the consumer price index previously used, potentially pushing taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA adopted the C-CPI-U on a permanent basis.

Individual income taxes

Tax-bracket thresholds increase for each filing status but, because they’re based on percentages, they increase more significantly for the higher brackets. For example, the top of the 10% bracket will increase by $600–$1,200, depending on filing status, but the top of the 35% bracket will increase by $18,725–$37,450, again depending on filing status.

The TCJA suspended personal exemptions through 2025. However, it nearly doubled the standard deduction, indexed annually for inflation, through 2025. In 2024, the standard deduction will be $29,200 (for married couples filing jointly), $21,900 (for heads of households), and $14,600 (for singles and married couples filing separately). After 2025, the standard deduction amounts are scheduled to drop back to the amounts under pre-TCJA law unless Congress extends the current rules or revises them.

Changes to the standard deduction could help some taxpayers make up for the loss of personal exemptions. But they might not help taxpayers who typically itemize deductions.

AMT

The alternative minimum tax (AMT) is a separate tax system that limits some deductions, doesn’t permit others and treats certain income items differently. If your AMT liability is greater than your regular tax liability, you must pay the AMT.

Like the regular tax brackets, the AMT brackets are annually indexed for inflation. In 2024, the threshold for the 28% bracket will increase by $11,900 for all filing statuses except married filing separately, which will increase by half that amount.

The AMT exemptions and exemption phaseouts are also indexed. The exemption amounts in 2024 will be $85,700 for singles and $133,300 for joint filers, increasing by $4,400 and $6,800, respectively, over 2023 amounts. The inflation-adjusted phaseout ranges in 2024 will be $609,350–$952,150 (for singles) and $1,218,700–$1,751,900 (for joint filers). Amounts for married couples filing separately are half of those for joint filers.

Education and child-related breaks

The maximum benefits of certain education and child-related breaks will generally remain the same in 2024. But most of these breaks are limited based on a taxpayer’s modified adjusted gross income (MAGI). Taxpayers whose MAGIs are within an applicable phaseout range are eligible for a partial break — and breaks are eliminated for those whose MAGIs exceed the top of the range.

The MAGI phaseout ranges will generally remain the same or increase modestly in 2024, depending on the break. For example:

The American Opportunity credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the American Opportunity credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit per eligible student is $2,500.

The Lifetime Learning credit. For tax years beginning after December 31, 2020, the MAGI amount used by joint filers to determine the reduction in the Lifetime Learning credit isn’t adjusted for inflation. The credit is phased out for taxpayers with MAGI in excess of $80,000 ($160,000 for joint returns). The maximum credit is $2,000 per tax return.

The adoption credit. The phaseout range for eligible taxpayers adopting a child will increase in 2024 — by $12,920. It will be $252,150–$292,150 for joint, head-of-household and single filers. The maximum credit will increase by $860, to $16,810 in 2024.

(Note: Married couples filing separately generally aren’t eligible for these credits.)

These are only some of the education and child-related tax breaks that may benefit you. Keep in mind that, if your MAGI is too high for you to qualify for a break for your child’s education, your child might be eligible to claim one on his or her tax return.

Gift and estate taxes

The unified gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption are both adjusted annually for inflation. In 2024, the amount will be $13.61 million (up from $12.92 million for 2023).

The annual gift tax exclusion will increase by $1,000 to $18,000 in 2024.

Retirement plans

Nearly all retirement-plan-related limits will increase for 2024. Thus, depending on the type of plan you have, you may have limited opportunities to increase your retirement savings if you’ve already been contributing the maximum amount allowed:

Your MAGI may reduce or even eliminate your ability to take advantage of IRAs. Fortunately, IRA-related MAGI phaseout range limits all will increase for 2024:

Traditional IRAs. MAGI phaseout ranges apply to the deductibility of contributions if a taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan:

• For married taxpayers filing jointly, the phaseout range is specific to each spouse based on whether he or she is a participant in an employer-sponsored plan:
  • For a spouse who participates, the 2024 phaseout range limits will increase by $7,000, to $123,000–$143,000.
  • For a spouse who doesn’t participate, the 2024 phaseout range limits will increase by $12,000, to $230,000–$240,000.
• For single and head-of-household taxpayers participating in an employer-sponsored plan, the 2024 phaseout range limits will increase by $4,000, to $77,000–$87,000.

Taxpayers with MAGIs in the applicable range can deduct a partial contribution; those with MAGIs exceeding the applicable range can’t deduct any IRA contribution.

But a taxpayer whose deduction is reduced or eliminated can make nondeductible traditional IRA contributions. The $7,000 contribution limit for 2024 (plus $1,000 catch-up, if applicable, and reduced by any Roth IRA contributions) still applies. Nondeductible traditional IRA contributions may also be beneficial if your MAGI is too high for you to contribute (or fully contribute) to a Roth IRA.

Roth IRAs. Whether you participate in an employer-sponsored plan doesn’t affect your ability to contribute to a Roth IRA, but MAGI limits may reduce or eliminate your ability to contribute:

• For married taxpayers filing jointly, the 2024 phaseout range limits will increase by $12,000, to $230,000–$240,000.
• For single and head-of-household taxpayers, the 2024 phaseout range limits will increase by $8,000, to $146,000–$161,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

(Note: Married taxpayers filing separately are subject to much lower phaseout ranges for both traditional and Roth IRAs.)

2024 cost-of-living adjustments and tax planning

With many of the 2024 cost-of-living adjustment amounts trending higher, you may have an opportunity to realize some tax relief next year. In addition, with certain retirement-plan-related limits also increasing, you may have the chance to boost your retirement savings. If you have questions on the best tax-saving strategies to implement based on the 2024 numbers, please give us a call. We’d be happy to help.

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Do you use an automobile in your trade or business? If so, you may question how depreciation tax deductions are determined. The rules are complicated, and special limitations that apply to vehicles classified as passenger autos (which include many pickups and SUVs) can result in it taking longer than expected to fully depreciate a vehicle.

Depreciation is built into the cents-per-mile rate

First, be aware that separate depreciation calculations for a passenger auto only come into play if you choose to use the actual expense method to calculate deductions. If, instead, you use the standard mileage rate (65.5 cents per business mile driven for 2023), a depreciation allowance is built into the rate.

If you use the actual expense method to determine your allowable deductions for a passenger auto, you must make a separate depreciation calculation for each year until the vehicle is fully depreciated. According to the general rule, you calculate depreciation over a six-year span as follows: Year 1, 20% of the cost; Year 2, 32%; Year 3, 19.2%; Years 4 and 5, 11.52%; and Year 6, 5.76%. If a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions instead of the percentages listed above.

For a passenger auto that costs more than the applicable amount for the year the vehicle is placed in service, you’re limited to specified annual depreciation ceilings. These are indexed for inflation and may change annually. For example, for a passenger auto placed in service in 2023 that cost more than a certain amount, the Year 1 depreciation ceiling is $20,200 if you choose to deduct first-year bonus depreciation. The annual ceilings for later years are: Year 2, $19,500; Year 3, $11,700; and for all later years, $6,960 until the vehicle is fully depreciated.

These ceilings are proportionately reduced for any nonbusiness use. And if a vehicle is used 50% or less for business purposes, you must use the straight-line method to calculate depreciation deductions.

Reminder: Under the Tax Cuts and Jobs Act, bonus depreciation is being phased down to zero in 2027, unless Congress acts to extend it. For 2023, the deduction is 80% of eligible property and for 2024, it’s scheduled to go down to 60%.

Heavy SUVs, pickups and vans

Much more favorable depreciation rules apply to heavy SUVs, pickups, and vans used over 50% for business, because they’re treated as transportation equipment for depreciation purposes. This means a vehicle with a gross vehicle weight rating (GVWR) above 6,000 pounds. Quite a few SUVs and pickups pass this test. You can usually find the GVWR on a label on the inside edge of the driver-side door.

What matters is the after-tax cost

What’s the impact of these depreciation limits on your business vehicle decisions? They change the after-tax cost of passenger autos used for business. That is, the true cost of a business asset is reduced by the tax savings from related depreciation deductions. To the extent depreciation deductions are reduced, and thereby deferred to future years, the value of the related tax savings is also reduced due to time-value-of-money considerations, and the true cost of the asset is therefore that much higher.

The rules are different if you lease an expensive passenger auto used for business. Contact us if you have questions or want more information.

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In the midst of holiday parties and shopping for gifts, don’t forget to consider steps to cut the 2023 tax liability for your business. You still have time to take advantage of a few opportunities.

Time deductions and income

If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2023 and deferring income into 2024 (assuming you expect to be taxed at the same or a lower rate next year).

For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2023 even though you don’t pay the credit card bill until 2024. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2023.

As for deferring income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.

Buy assets

If you’re thinking about purchasing new or used equipment, machinery or office equipment in the new year, it might be time to act now. Buy the assets and place them in service by December 31, and you can deduct 80% of the cost as bonus depreciation in 2023. This is down from 100% for 2022 and it will drop to 60% for assets placed in service in 2024. Contact us for details on the 80% bonus depreciation break and exactly what types of assets qualify.

Bonus depreciation is also available for certain building improvements.

Fortunately, the first-year Section 179 depreciation deduction will allow many small and medium-sized businesses to write off the entire cost of some or all of their 2023 asset additions on this year’s federal income tax return. There may also be state tax benefits.

However, keep in mind there are limitations on the deduction. For tax years beginning in 2023, the maximum Sec. 179 deduction is $1.16 million and a phaseout rule kicks in if you put more than $2.89 million of qualifying assets into service in the year.

Purchase a heavy vehicle

The 80% bonus depreciation deduction may have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.

Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturer’s gross vehicle weight rating above 6,000 pounds. You can verify a vehicle’s weight by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door. If you’re considering buying an eligible vehicle, placing one in service before year end could deliver a significant write-off on this year’s return.

Think through tax-saving strategies

Keep in mind that some of these tactics could adversely impact other aspects of your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.

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The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $168,600 for 2024 (up from $160,200 for 2023). Wages and self-employment income above this threshold aren’t subject to Social Security tax.

Basic details

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.

There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2024, the FICA tax rate for employers will be 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2023).

2024 updates

For 2024, an employee will pay:

• 6.2% Social Security tax on the first $168,600 of wages (6.2% x $168,600 makes the maximum tax $10,453.20), plus
• 1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns), plus
• 2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns, $125,000 for married taxpayers filing separate returns).

For 2024, the self-employment tax imposed on self-employed people will be:

• 12.4% Social Security tax on the first $168,600 of self-employment income, for a maximum tax of $20,906.40 (12.4% x $168,600), plus
• 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
• 3.8% (2.90% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing separate returns).

Employees with more than one employer

You may have questions if an employee who works for your business has a second job. That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? The answer is no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.

We’re here to help

Do you have questions about payroll tax filing or payments? Contact us. We’ll help ensure you stay in compliance.

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With the gift and estate tax exemption amount at $12.92 million for 2023, only a small percentage of families are subject to federal estate tax. While that’s certainly a relief, state estate tax also must be considered in estate planning.

Although many states tie their exemption amounts to the federal exemption, several states have exemptions that are significantly lower — in some cases $1 million or less. You may be considering retiring to a state with no (or a lower) state estate tax. However, doing so may not net the result you’re after.

Severing ties with your former state

Moving to a tax-friendly state doesn’t necessarily mean you’ve escaped taxation by the state you left. Unless you’ve sufficiently cut ties with your former state, there’s a risk that the state will claim you’re still a resident and subject to its estate tax.

Even if you’ve successfully established residency in a new state, you may be subject to estate tax on real estate or tangible personal property located in the old state (depending on that state’s tax laws). And don’t assume that your estate won’t be taxed on this property merely because its value is less than the exemption amount. In some states, estate tax is triggered when the value of your worldwide assets exceeds the exemption amount.

Taking steps to establish residency

If you’re relocating to a state with low or no estate tax, consult your estate planning advisor about the steps you can take to terminate residency in your old state and establish residency in the new one. Examples include acquiring a home in the new state, obtaining a driver’s license and registering to vote there, receiving important documents at your new address, opening bank accounts in the new state and closing the old ones, and moving cherished personal possessions to the new state.

If you own real estate in the old state, consider transferring it to a limited liability company or other entity. In some states, interests in these entities may be treated as nontaxable intangible property.

The bottom line

Before putting up the “For Sale” sign and moving to lower-tax pastures, consult with us. We can help you address your current and future states’ estate tax in your estate plan.

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This year, many Americans have been victimized by wildfires, severe storms, flooding, tornadoes and other disasters. No matter where you live, unexpected disasters may cause damage to your home or personal property. Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But currently, there are restrictions that make these deductions harder to take.

What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or a terrorist attack.

Many unable to claim a tax break

For losses incurred from 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters.

Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Claim a refund with a special election

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can potentially help you get extra cash when you need it.

This election must be made no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

Calculating the deduction

You must take the following three steps to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:

1. Subtract any insurance proceeds.
2. Subtract $100 per casualty event.
3. Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction.

Important: Another factor that makes it harder to claim a casualty loss than it was years ago is that you must itemize deductions to claim one. Through 2025, fewer people will itemize because the TCJA significantly increased the standard deduction amounts. For 2023, they’re $13,850 for single filers, $20,800 for heads of households, and $27,700 for married joint-filing couples. So even if you qualify for a casualty deduction, you might not get any tax benefit because you don’t have enough itemized deductions.

Lawmakers debate the issue

Earlier this year, a bipartisan group of lawmakers in Washington introduced a bill that would make the deduction available to more taxpayers. The proposed Casualty Loss Deduction Restoration Act would reinstate the deduction to all taxpayers with a casualty loss — not just those located in a federal disaster declaration area. Passage of the bill is uncertain at this time.

We can help

The rules described above are for personal property. Keep in mind that the rules for business or income-producing property are different and other rules may apply. (It’s easier to get a deduction for a business property casualty loss.) If you’re a victim of a disaster, we can help you understand the complex tax deduction rules.

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Payable-on-death (POD) accounts can provide a quick, simple and inexpensive way to transfer assets outside of probate. They can be used for bank accounts, certificates of deposit and even brokerage accounts.

Setting one up is as easy as providing the bank with a signed POD beneficiary designation form. When you die, your beneficiaries just need to present a certified copy of the death certificate and their identification to the bank, and the money or securities will be theirs.

Beware of potential pitfalls

Be aware, however, that POD accounts can backfire if they’re not coordinated carefully with the rest of your estate plan. Too often, people designate an account as POD as an afterthought, without considering whether it may conflict with their wills, trusts or other estate planning documents.

Suppose, for example, that Shannon dies with a will that divides her property equally among her three children. She also has a $50,000 bank account that’s payable on death to her oldest child. The conflict between the will and POD designation may have to be resolved in court, which will delay distribution of her estate and generate substantial attorneys’ fees.

Another potential problem with POD accounts is that, if you use them for most of your assets, the assets left in your estate may be insufficient to pay debts, taxes or other expenses. Your executor would then have to initiate a proceeding to bring assets back into the estate.

POD accounts are often used to hold a modest amount of funds that are available immediately to your executor or other representative to pay funeral expenses, bills and other pressing cash needs while your estate is being administered. Using these accounts for more substantial assets may lead to intrafamily disputes or costly litigation.

Turn to your advisor

If you use POD accounts as part of your estate plan, be sure to review the rest of your plan carefully to avoid potential conflicts. We can help you coordinate the use of POD accounts with your estate plan.

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Perhaps you’ve been in this situation before: You have a financial emergency and need to get your hands on some cash. You consider taking money out of a traditional IRA or 401(k) account but if you’re under age 59½, such distributions are not only taxable but also are generally subject to a 10% penalty tax.

There are exceptions to the 10% early withdrawal penalty, but they don’t cover many types of emergencies.

Good news: Beginning in 2024, there will be new relief for some taxpayers facing emergencies. The SECURE 2.0 law, which was enacted late last year, contains two different relevant provisions:

1. Pension-linked emergency savings accounts. Employers with 401(k), 403(b) and 457(b) plans can opt to offer these emergency savings accounts to non-highly compensated employees. For 2024, a participant who earned $150,000 or more in 2023 is a highly compensated employee. Here are some more details of these new type of accounts:

• Contributions to the accounts will be limited to up to $2,500 a year (or a lower amount determined by the plan sponsor).
• The accounts can’t have a minimum contribution or account balance requirement.
• Employers can offer to enroll eligible participants in these accounts beginning in 2024 or can automatically enroll participants in them.
• Participants can make a withdrawal at least once per calendar month and such withdrawals must be made “as soon as practicable.”
• For the first four withdrawals from an account in a plan year, participants can’t be subject to any fees or charges. Subsequent withdrawals may be subject to reasonable fees or charges.
• Contributions must be held as cash, in an interest-bearing deposit account or in an investment product.
• If an employee has a pension-linked emergency savings account and is not highly compensated, but becomes highly compensated as defined under tax law, he or she can’t make further contributions but retains the right to withdraw the balance.
• Contributions will be made on a Roth basis, meaning they are included in an employee’s taxable income but participants won’t have to pay tax when they make withdrawals.

2. Penalty-free withdrawals for emergency expenses. This new provision is another way to get money for emergencies. As mentioned earlier, taking a distribution from an IRA or 401(k) before age 59½ generally results in a 10% penalty tax unless an exception exists. SECURE 2.0 adds a new exception for certain distributions used for emergency expenses, which are defined as “unforeseeable or immediate financial needs relating to personal or family” emergencies.

Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions made beginning in 2024.

Guidance likely coming soon

These are just the basic details of the two new emergency-related provisions. Other rules apply and the IRS will need to issue guidance to address certain details. Contact us if you have questions or need cash and want to explore the most tax-efficient ways to tap one of your accounts.

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