As the end of year approaches, our client conversations turn to how we can strategically minimize taxes. We call this tax planning, and together we look at the ways they give, save, and invest. We also consider how tax laws might be changing from one year to the next.
The Consolidated Appropriations Act of 2023 is one example for this year. While the bill contains a variety of retirement provisions, some of the most important changes take effect in 2023. (Find the details in this article.) It is also important to remember that some tax opportunities in 2023 may go away by December 31, 2025, when the 2017 Tax Cuts and Jobs Act (TCJA) expires. So be sure to take advantage of those tax breaks while they are still available.
Here, we will look at deductions and opportunities to consider as you prepare to close out your tax year.
If you are under age 50 and looking to make headway on retirement savings, the retirement contributions deduction could be a valuable option. This elective deferral (contribution) is for employees under 50 who participate in 401(k), 403(b), and most 457 plans, as well as the federal Thrift Savings Plan. The annual limit is $22,500 per individual.
If you are age 50 and over, the catch-up contribution for employees participating in the same types of plans is still available. That limit increased this year to $7,500 per individual (or $30,000 in contributions for the full year). For both options, all contributions must be made in 2023.
Do you want to max out your IRA contributions? The limit for individuals increased to $6,500 for 2023. The catch-up contribution limit for folks age 50 and over, which is not subject to an annual cost-of-living adjustment, remains $1,000 (or $7,500 in total for the year). IRA contributions for 2023 can be made up to the April 15, 2024, filing deadline.
The TCJA roughly doubled the standard deduction amounts. If income tax deductions are important to you when making charitable gifts, keep in mind your total itemized deductions must exceed the standard deduction amount to realize the benefit. For 2023 tax returns, the standard deduction for individuals is $13,850, and the standard deduction for married couples filing jointly and surviving spouses is $27,700. If you itemize deductions, you may want to bunch two to three years’ worth of charitable gifts into 2023. (Contributions to a donor-advised fund are a great way to use this technique.)
Another change to note is that the Consolidated Appropriations Act shifted the age for required minimum withdrawals from retirement accounts from age 72 to 73. The law does still allow taxpayers age 70 ½ and older to make a Qualified Charitable Distribution (QCD) in the form of a direct transfer (up to $100,000). The payment goes directly from their IRA to a charity, including all or part of the required minimum distribution (RMD).
This is an excellent way for seniors to take RMDs while reducing their taxable IRA distribution amount. If you pursue this option, it is critical to send the funds directly from your retirement account to the charity. The contribution will be disqualified if the money stops in your checking (or other) account along the way. The funds must come out of your IRA by December 31, 2023.
Deductions are crucial to reducing tax exposure, and it is essential to understand which ones work for you. Tax deductions such as state and local taxes, mortgage interest, and charitable deductions were seriously cut back through the TCJA. This means you may need to bundle up if you want to itemize.
Depending on your financial situation and portfolio, it might make sense to accelerate your mortgage payments. You could consider paying off more of your mortgage and work toward retiring that debt now that the tax deduction for mortgage interest is capped.
Separately, if your 2024 property taxes are billed or levied before the end of 2023, you can prepay them and claim them as a deduction. Note: This is only possible, however, if your local government formally bills your 2024 taxes by December 31, 2023.
Unreimbursed medical expenses are also deductible if they meet the 7.5% Adjusted Gross Income (AGI) floor. This means accelerating any medical procedures and payments your health insurance does not cover could be helpful. This deduction may also include long-term care premiums and some home modifications if you are planning to age in place.
Capital Gains and Losses
You can pursue several different tax-saving opportunities within your investment portfolio. Start by reviewing the various sales you have realized on stocks, bonds, and other investments this year. Then check your remaining investments and determine whether they have an unrealized gain or loss. (“Unrealized” means you still own the investment, versus “realized,” which means you have sold the asset.)
You may qualify for a 0% capital gains tax rate for some or all the long-term capital gains you realize in 2023 (see the following chart). If this is the case, then you will want to determine the highest gains you can realize while still taking advantage of the tax break.
2023 Income Tax Rates on Long-Term Capital Gains
(Married Filing Separately)
(Head of Household)
(Married Filing Jointly)
|0%||up to $44,625||up to $44,625||up to $59,750||up to $89,250|
Still in place for 2023 is the 3.8% surtax on net investment income. This kicks in for single people with modified AGI over $200,000 and joint filers with modified AGI over $250,000. If this applies to you, one strategy is to determine if you have unrealized losses that can be harvested to reduce the amount of surtax.
Loss harvesting means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 of net capital losses that can offset other income, such as wages, interest, and dividends. Any remaining unused capital losses can be carried into future years indefinitely.
When you have a complex financial life, decreasing your tax liability requires a strategic tax plan. There are many moving parts. Making one decision could have unintended consequences that defeat your tax-saving strategy.
As financial advisers, we are proactive when it makes sense. Proper tax planning requires an awareness of what is new and changed from last year. Looking at your entire financial picture helps us design a plan to excavate all the “hidden” opportunities available to you specifically.
- Contributions to an employer-sponsored plan must be made by December 31, 2023, to qualify for the 2023 tax year.
- The 2017 Tax Cuts and Jobs Act roughly doubled the standard deduction for most taxpayers.
- An additional 3.8% surtax is levied against investment income for high-income taxpayers.