Each year is an opportunity to review your expected tax bracket and tax planning opportunities to consider before year end. While each person’s set of facts varies, below are a few common tax planning considerations.
Tax planning generally begins by estimating your current and future year tax brackets, and maximizing the benefit of low tax bracket years. If you are expecting to be in a lower tax bracket in the current year, you might consider accelerating income. Options include taking a traditional IRA distribution or converting funds from your traditional IRA to a Roth IRA. On the other hand, if you’ll be in the same or a lower tax bracket in a future, consider deferring income where possible. To do this you might make tax-deferred retirement and health savings account contributions, make a charitable donation, or harvest capital losses (all discussed further below).
It’s also important to be aware of your projected adjusted gross income (“AGI”). Many tax benefits (such as certain IRA contributions, child tax credits, and student loan interest deduction) phase out once AGI passes specified thresholds. Consider reducing AGI to take advantage of these measures as well.Due to stock market volatility, you may hold securities that have declined in value. This may provide an opportunity to realize those losses, which can be used to offset current or future capital gains and up to $3,000 of ordinary income annually. Note that tax loss harvesting does not mean removing funds from the stock market entirely; proceeds from loss‐generating sales can be re‐invested into a similar asset class or the exact investment can be repurchased 30 days after the loss is realized.
Each year, you may deduct the larger of your itemized deductions (taxes, mortgage interest, charitable contributions, etc.) or the appropriate standard deduction based on your age and filing status. If the total of your itemized deductions is close to the standard deduction amount, you may consider bunching itemized deductions into one year and then taking the standard deduction the next year.
For taxpayers who itemize deductions, there may be an advantage to donating appreciated stock to charity versus selling the stock and donating the proceeds. The value of the donation for the tax deduction is based on the fair market value of the donated shares. For stocks with a low tax basis, this technique allows the taxpayer to not only have the advantage of a larger deduction but also to avoid capital gains tax upon disposing of the stock.
Taxpayers may also want to consider donating to a donor advised fund. This technique allows you to contribute cash or appreciated securities to a charitable fund and receive a current year tax deduction for the donation made in a current or future year.
If you have an IRA and you are taking Required Minimum Distributions (RMDs), you should consider making a charitable donation directly from your IRA. This technique, called a Qualified Charitable Distribution (QCD), allows for all or a portion of your RMD (up to $100,000 per taxpayer) to be transferred directly to a qualified charity. Rather than reporting the income from the IRA withdrawal and a subsequent deduction for a contribution to charity, the QCD is excluded from your income altogether. In addition to the income tax benefit, you also reduce your modified AGI used for determining Medicare premiums and other deduction phase‐outs. Also, beginning in 2023, your QCD can include a one-time gift of up to $50,000 to a split-interest equity like a charitable remainder trust or charitable gift annuity.Every year, you should think about what retirement contributions you may be eligible to make. Take advantage of deferrals offered through your employer’s retirement plan. If you are self‐employed, consider whether an IRA, SEP IRA, or individual 401(k) is the best option for your retirement funding. You may also be eligible to make contributions to a Roth IRA that grows tax-deferred and has tax-free withdrawals when conditions are met.
Health Savings Accounts (HSAs) are a great tax planning tool as well for those covered by a high-deductible health plan. Contributions are tax deductible above-the-line (reduces AGI), funds grow tax-deferred, and withdrawals for qualified medical expenses are tax-free. Unlike other health accounts, HSA funds do not have a “use-it-or-lose-it” restriction. Unused funds stay in your account and move with you if you change jobs. Additionally, an HSA can be used as an additional tax-deferred retirement account – once you reach age 65, funds can be withdrawn for any reason, though tax will apply if not used for medical purposes.
Consider transferring wealth via gifts. You and your spouse are each allowed to gift up to $17,000 per recipient annually, without using any of your lifetime gift and estate exemption. In addition, you may also make health care and education payments directly to a provider. Contributions to a college savings 529 plan may also be beneficial at the state level and beginning in 2024, accounts open for more than 15 years can roll tax and penalty free into Roth IRAs.
Many locations across the nation endured natural disasters during the year. While the Tax Cuts and Jobs Act (TCJA) limited personal casualty losses for tax years 2018 – 2025, individuals are still allowed to take those attributable to federally declared disasters. Instead of waiting to claim the loss on your 2023 tax return, you can elect to deduct the loss in the tax year before the loss occurred on an amended return.
The Inflation Reduction Act (IRA) extended and enhanced several energy-related tax credits. If you are considering purchasing a new vehicle or making home repairs, make sure to review IRA incentives HERE.
Published: 11/10/2023
Readers should not act upon information presented without individual professional consultation.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.