End of Year Tax Planning (Updated 2023)

As 2023 is coming to a close that means year-end tax planning is among us. At Market Street, tax planning is thought about and performed throughout the year, but there are several items that we can look at after a client’s full year of income is more known. I’ll touch on those items below.

Capital Gain/Loss Harvesting

One of the first things to look at is capital gain and loss harvesting. Harvesting in an investment sense is a little jargon-y. It’s all about optimizing your taxes. For harvesting gains, if your income is below certain thresholds based on your tax filing status, you could pay 0% on capital gains. For 2023, the taxable income limit is $44,625 for singles and $89,250 for married filing jointly. 

If your taxable income before capital gains is below the amounts above, you generate a capital gain and it wouldn’t be taxed at the federal level. This is ideal for clients who live off their investments and need cash generated regularly to support future cash withdrawals.

Capital loss harvesting has a little different spin. If a certain security has a loss for the year, look at locking in that loss by selling it so it can offset capital gains from other transactions or to just carry forward to the next year. 

If you have no capital gains, you can take up to $3,000 of losses in the current year on your tax return. Any remaining losses get carried forward to future years. This should really be viewed as a future tax asset to offset future capital gains.

Last tax year (2022) created a unique opportunity where capital losses were likely taken in March/April of 2022. Depending on each person’s situation, it’s likely those losses carried forward to 2023. This is important to review during the tax planning process because those losses offset gains. The carried forward amount can be found on page 2 of Schedule D of your 2022 tax return.

Roth Conversions

There has been talk about Roth conversions going away in the future. Roth conversions are when you move dollars from an IRA to a Roth IRA. It’s a taxable event in the year it’s completed, so why do it? 

First, once dollars are in a Roth IRA, they aren’t taxed ever again. Secondly, it’s ultimately a way to save on taxes over your lifetime, not particularly in the current year. 

Based on an individual’s situation, you compare their current top tax bracket to future top tax brackets. If the future is projected to be more, a Roth conversion now could make sense to pay tax now at a lower rate versus paying a greater percentage of tax in the future.

Required Minimum Distributions

Last year, because of tax legislation passed by Congress, required minimum distributions (RMD) for IRAs and inherited IRAs were not required. This year, they are back in force. So, it’s important to make sure you take your RMDs before 12/31/23. There is a steep penalty of 25% of the amount not taken.

If you are charitably inclined, a way to help reduce taxes would be to give to charity straight from your IRA. To qualify, these charities must be 501(c)(3) entities. When you give via directly from your IRA, the portion given to the charity is not taxed but does count towards your RMD. To make this easy, some investment custodians allow check writing privileges.

Employer Tax Withholding

The form used to calculate your annual tax withholding, form W4, can be confusing to complete. Because of the complexity, your tax withholdings may be incorrect. Another thing that could cause your tax withholding to be off is if you changed jobs or added an addition to your family. 

For those individuals who are still working, it may be worthwhile to have a professional review your current tax withholding and compare it with your projected tax bill for the year. This could prevent a surprise when you are filing your taxes in a few months.

Charitable Giving

Donor Advised Funds

Another way to help reduce your tax bill this year is contributing to a donor advised fund. These accounts are best used if you can contribute several years of planned giving at one time. Ever since the Tax Cuts and Jobs Act of 2017, writing off charitable gifts became more difficult because the standard deduction increased.

Donating Appreciated Securities

Another tax-efficient way to give to charity is by giving appreciated securities. What’s the difference between giving a security versus cash? It’s the tax savings. 

For example, if you own a stock that has significantly appreciated since it was originally appreciated, you can give the stock to a charity and take the market value (versus the purchased amount) as a tax deduction if eligible based on itemizing your deductions. If you sold the stock to take the cash and give it to the charity, you would have incurred taxes for the gain on the sale. 

As I mentioned in the paragraph above, moving appreciated securities to donor-advised funds to cover multiple years of charitable giving could be a huge tax savings.

Contributing to 529 Plans

The cost of education continues to rise. One of the best ways to help plan for college education is using a 529 savings account. These accounts grow tax free and when used for qualified college expenses, they can be withdrawn tax free. Now they can be used for qualified K-12 expenses too. Some states even provide a tax incentive to contribute to these.

All of the above are great talking points for you and your financial planner and/or your tax advisor to explore for year end tax planning. At Market Street, we visit these topics with our clients and incorporate them in our financial planning. Feel free to reach out to a member of our team if you have any questions on the topics above.