Maximizing Tax Benefits: Developments in Tax Law

With the multitude of recent changes in tax laws and regulations, it is more essential than ever for lawyers to stay informed and proactive in their tax planning strategies in order to have any chance at maximizing tax benefits. From choosing the right business entity to deducting business expenses and retirement planning, there are many ways lawyers can minimize their tax burden and maximize their savings. In this article, we will explore some of the most critical tax considerations for lawyers in 2023 and provide practical tips to help you navigate the changing tax landscape.

The Demise Of The ‘Crack and Pack’ Business Segregation Tax Strategy

As many lawyers already know, in late-2018, the IRS released proposed regulations under Internal Revenue Code Section 199A regarding the implementation of the 20% tax deduction for qualified business income. Lawyers and law firms, among others, have been particularly affected by the phase-out of the 20% pass-through deduction. New regulations limit the ability of law firms and other specified service trades and businesses (“SSTB”) professionals to segregate SSTB and non-SSTB services and still obtain benefits from the qualified business income classification. Over the past several years, these new limitations on the way income is classified has effectively resulted in the phase-out or elimination of the 20% deduction against qualified business income for many law firms.

Inflation Reduction Act of 2022 And Its Impact On Lawyers.

In addition to the Tax Cuts And Jobs Act, the more recent Inflation Reduction Act of 2022 has changed and otherwise impacted a wide range of tax laws. The IRS has issued the following guidance:

Reporting rules changed for Form 1099-K. Taxpayers should have received Form 1099-K, Payment Card and Third Party Network Transactions, as of January 31, 2023, if they received third party payments in tax year 2022 for goods and services that exceeded $600.
- Prior to 2022, Form 1099-K was issued for third party networks transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. The American Rescue Plan Act of 2021 lowered the reporting threshold for third party networks that process payments for those doing business.
- Now a single transaction exceeding $600 can require the third party platform to issue a 1099-K. Money received through third party payment networks from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable.
No above-the-line charitable deductions. During COVID, taxpayers could take up to a $600 charitable donation tax deduction on their tax returns. However, in 2022, those who take a standard deduction may not take an above-the-line deduction for charitable donations.
More people may be eligible for the Premium Tax Credit. For tax year 2022, taxpayers may still qualify for temporarily expanded eligibility for the premium tax credit.
For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.
For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050.
- For tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022.
- For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022.
For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.
Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022.

SECURE 2.0 Act of 2022

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 revised existing rules around retirement saving, including raising the age of required minimum distributions and eliminating age limits for traditional IRA contributions. Congress has now passed the SECURE 2.0 Act, which changes the rules governing retirement savings. As relevant to lawyers and law firms:

Workplace retirement plans will have automatic enrollment starting in 2025.
Catch-up contributions for those 50 and older have increased to $7,500 effective January 1, 2023. Workers aged 60 to 63 can make catch-up contributions of up to $11,250 per year starting January 1, 2025.
Certain penalty-free distributions will be allowed for terminally-ill individuals, victims of domestic abuse, and those affected by federally-declared disasters.
Unused balances in 529 education savings plans can be transferred to a Roth IRA, up to $35,000, without taxes or penalties.
Individuals 70-1/2 or older can make a one-time gift of up to $50,000 from an IRA to a qualified 501(c)(3) charitable organization. The amount directed into a trust or annuity would apply toward the $100,000 annual total QCD gift.

Tax — The recent tax changes have broad implications for law firms and their clients, including modifications to deductions, credits, and rates. It is now more important than ever for lawyers and law firms to stay informed and comprehend how these changes may affect their business operations and their clients’ interests. With the appropriate guidance, law firms can effectively navigate these changes and seize the available tax benefits, thereby enhancing their bottom line.

We help to maximize your tax benefits.

Give us a call to find out how we can help your firm. Among other things, working with Law Ledgers provides an efficient way of tracking expenses and income, which is essential to tax preparation. Our team specializes in identifying deductions for which you are eligible. Because we work only with lawyers and law firms, we understand the deduction landscape and can suggest meaningful deductions which are not always readily apparent. Furthermore, we provide a secure and simple way of keeping all the records and documentation needed for tax purposes, which greatly simplifies the process of filing taxes. By using Law Ledgers, lawyers and law firms have a better understanding of their financials and make more informed decisions about how to allocate their resources.

Please note that the information provided on this website is for general informational purposes only and is not intended as legal or tax advice. The information is subject to change, and it is important to consult a specialist before making any decisions. Law Ledgers provides accounting services to New York lawyers and law firms, including escrow protection, tax advice and bookkeeping administration. Contact us today for personalized support.