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As we wrap up 2023, it’s important to take a closer look at your tax and financial plans and discuss steps to reduce taxes and help you save for your future. With the current political climate, there has been minimal tax legislation. Looking to the future, the potential for change is on the horizon, and we continue to closely monitor any potential tax legislation and update you accordingly.

We’re here to help explain tax and financial planning opportunities. Please contact us at your earliest convenience to discuss your situation so we can develop a customized plan.

In the meantime, here’s a look at some issues that may impact you to consider as we approach year-end. 

Timing of Income and Deductions

If you have the ability to control the timing of your income, you can accelerate or defer income and deductions to manage your income tax brackets. It is imperative to not only look at 2023, but also what lies ahead in 2024 and the future to time income, deductions, retirement plan contributions, charitable gifts, etc.

Consider Year-End Investment Decisions

Work with your investment advisors to develop a plan for tax efficient investing. Consider waiting until January to sell so that you realize your capital gain or loss next year if you are in a higher marginal tax bracket in the current year and expect to be in a lower one in the following year. If you expect to recognize a capital gain this year, you should review your portfolio for possible capital losses that can be used to offset the gains. If you have any capital loss carryforwards, you should review your portfolio for capital gain opportunities to make use of such carryforwards.

Maximize Charitable Contribution Deduction

Taxpayers, especially those that are close to the standard deduction, may want to consider bundling their charitable contributions into 2023 to take advantage of this deduction. Contributing to a donor advised fund(s) (DAFs) is a strategy to consider as well. DAFs allow you to make a substantial charitable contribution in a high-income year while directing the payment of the actual grants in future years.

If AGI limits are not a factor, consider donating appreciated securities. When stock is donated to qualified charitable organizations, you receive a tax deduction for the full fair market value and avoid paying capital gains tax on the appreciation.

An additional option is making a qualified charitable distribution from your IRA required minimum distribution.  If you already took your RMD for 2023 this is a strategy to consider for 2024.

Health Savings Accounts

Consider setting up a health savings account (HSA). HSAs allow you to deduct contributions to the account, the investment earnings are tax-deferred until withdrawn, and any amounts you withdraw are tax-free when used to pay qualified medical expenses. Once you reach age 65 you can withdraw funds for any reason and the withdrawal is treated much like an IRA. HSAs for 2023 may be established and contributions made by April 15, 2024.

Maximize Contributions to Retirement Plans

Contributing to retirement plans may lower AGI and allow tax deferred savings. If allowed by your retirement plan, consider Roth contributions.

Required Minimum Distributions (RMD)

Beginning in 2023, the SECURE Act 2.0 raised the age that a taxpayer must begin taking required minimum distributions (RMDs) to age 73. If the individual reaches age 72 in 2023, the required beginning date for the first RMD is April 1, 2025, for 2024. If the taxpayer reaches age 73 in 2023, the taxpayer was 72 in 2022 and subject to the age 72 RMD rule in effect for 2022. If the taxpayer reached age 72 in 2022, the first RMD was due April 1, 2023, and the second RMD is due December 31, 2023.

Roth IRA Conversions

Consider converting traditional-IRA money into a Roth IRA in 2023.

Reasons to consider a conversion include:

  1. There is no RMD requirement for Roth IRAs,
  2. With the impending reduction to the estate tax exemption, taxpayers may benefit by paying the income tax now and reducing their taxable estate,
  3. Taxpayers that want to leave IRA assets to their families will provide tax-free post death distributions, and
  4. Tax rates are historically low.

Keep in mind that the conversion will increase your income and tax for 2023.

529 Education Plans

Maximize contributions to your state sponsored 529 plans to take advantage of state tax deductions. 529 plans can now be used for elementary and secondary school tuition as well as college or vocational school.

Avoid penalties and interest

In order to avoid penalty and interest for underpayment of taxes, you must pay in 90% of your current year tax or 110% of your prior year tax through withholding or timely estimated tax payments. If your withholding has decreased and/or income has increased substantially you should consider increasing your remaining withholding or estimated payment.

Maximize Wealth Transfer Strategies

Under current law taxpayers may exclude gifts of up to $17,000 per individual per year. Consider outright gifts to children, LLC and partnerships, and non-grantor trusts.

You may also make direct payments to medical providers for medical bills or qualifying educational institutions for grade school through higher education without gift tax consequences.

The current estate exemption is $12.92 million ($25.84 million for married couples) increasing to $13.61 million in 2024. Even without any legislative changes, under current law, this exemption will sunset on December 31, 2025 and revert to an inflation-adjusted exemption of approximately $7 million ($14 million for married couples). If you have not already done so you should review your estate plan to develop a strategy which may include gifting assets now to take advantage of the higher exemption.

Please contact us if you would like to discuss year end planning. We will provide updates if any legislation is passed that affects 2023 tax plans.