Tax Tips for Year-End, 2023

With the end of October, the 2023 holiday season is about to get into full swing. And in addition to the holiday parties, the extra-tempting snacks in the break room at the office, and the time spent visiting family and friends, this also means that 2023 is winding down quickly. But it’s not too late for some smart moves that can potentially save you some money on the tax return you’ll file next April 15. Let’s take a look at a few ideas.

1. Defer income, accelerate deductions. Your CPA probably says this to you every year, right? But it’s still good advice, and it’s also one of the best ways to trim the amount you’ll owe the Treasury Department next April. If you’ve got the opportunity to delay receiving the proceeds from sales of assets, bonuses, or deferred compensation until after December 31, you can avoid paying tax on those amounts on your 2023 return. Of course, the Tax Cuts and Jobs Act (TCJA) of 2017 made it advantageous for most taxpayers to simply claim the standard deduction (in 2023, ($13,850 for single filers, $27,700 for couples). But if you’re charitably inclined, you might want to consider bundling two years’ contributions into one and claiming a larger amount for 2023; this could propel your total available deductions above the standard amount and further reduce your net taxable income. If you haven’t already done so, you might even want to take a look at donor-advised funds (DAFs) as a way to power up your charitable gifting strategy. A DAF can accept many different types of assets, including appreciated stock, real estate, and others. When the fund accepts the assets, a charitable donation is created, and then you can direct the fund to make gifts to qualified charitable organization of your choice.

2. Is it time for a Roth conversion? If you believe you could be in a higher tax bracket after retirement than you are presently, it could make sense to talk to your tax advisor about converting some or all of your traditional IRAs and other traditional retirement accounts to Roth accounts. Typically, we assume that most taxpayers will be in a lower bracket after retirement, but depending on an individual’s other sources of income and the level of growth in their accounts—combined with the loss of deductions after leaving a business—it is possible for some to find themselves with more taxable income in retirement than during their active careers. Not only that, but if marginal tax rates go up in the future, that could also bump certain retired taxpayers into a higher bracket. The required minimum distributions (RMDs) from traditional retirement accounts are taxed as ordinary income, each year when they are withdrawn. But Roth accounts have no RMDs; if you don’t require the income, you can leave the funds in the account. And withdrawals from Roth accounts are not considered as taxable income. The thing you need to understand, though, is that when you convert a traditional account to a Roth account, you must pay taxes on the converted amount (the “after-tax” nature of Roth contributions is the reason that the withdrawals aren’t considered taxable income). Still, depending on the specifics of your situation, it could make sense to pay the tax on that money now if you believe it could be taxed at a higher rate later.

3. Maximize your retirement account contributions. And speaking of retirement accounts, have you made the maximum contribution to your accounts for 2023? If you have a 401(k) or 403(b) at work, you can put in up to $22,500 this year ($30,000 if you’re 50 or older and your plan allows it), and the IRA contribution limit is $6,500 ($7,500 if you’re 50+). Ask your tax advisor about your deductibility limits for a traditional IRA; if your modified adjusted gross income (MAGI) is more than $116,000 in 2023, you may not be able to deduct the full $6,500. But the funds you deposit in the accounts will grow without taxation, and contributions to a traditional account provide a reduction in your taxable income.

4. Keep your eye on the “sunset.” Several provisions of the TCJA are set to expire at the end of 2025. Unless Congress passes legislation to prevent it, some of the “sunsetting” provisions include:

• • Higher individual tax rates (and see #2, above);
  • Lower exemption levels for alternative minimum tax (AMT);
  • Lower exemptions for estate and gift tax

The third item is probably of most concern to those with estates valued at or above $6 million. Because the TCJA significantly raised the bar for estates subject to taxes paid upon transfer to non-spousal heirs ($12.92 million in 2023), many wealthy individuals gained significant “breathing room” in their estate planning. But if this provision expires in 2025, estates with values above the prior limit—about $6.5 million, adjusted for inflation—will become subject to taxation at rates as high as 40%. One way that high-net-worth individuals may want to adapt to the potential of lower exemptions is by stepping up their annual gifting strategies. An individual may give away up to $17,000 per year ($34,000 for couples) to as many individuals or entities as desired with no imposition of gift taxes. This is one way to transfer assets out of the estate to children, charitable causes, or other entities and thus reduce the size of the taxable estate. It may also be advisable for those with larger estates to consult with their estate planning experts, reviewing wills, trusts, and other estate planning vehicles to make sure they are properly positioned for potentially lower exemption levels.

At Aspen Wealth Management, we want you to be well informed so that you are prepared to make smart choices with your financial and tax planning. To stay up to date on important financial matters, why not subscribe to our Alexa skill, “Purposeful Planning”? This online series provides concise, useful tips on money management, investing, and much more.