2023 Year-End Individual Tax Planning
2023 Year-End Individual Tax Planning
Before the end of the tax year, you may consider the following actions as a means of reducing your exposure to income taxes for the current year. Not all will apply to you, but many may. Please contact us to discuss the potential benefit and your eligibility before taking action.
1. As you get started, review your anticipated marginal tax bracket. Knowing which bracket you fall into can help you make informed decisions about deferring income or accelerating deductible expenses in order to maximize the use of lower tax brackets (or more preferred tax rates) and how much income can be incurred before higher rates kick in. WARNING: deferring income tax costs into a subsequent year does not always result in lower overall tax costs and may in fact increase your tax bill if the rates of taxation are higher in the subsequent year(s).
2. Maximize Retirement and other pre-tax contributions: If you have not already done so, consider maximizing contributions to tax-advantaged retirement accounts such as 401(k)s, IRAs, and HSAs. These contributions can reduce your taxable income and increase your retirement savings.
3. Roth IRA Conversions: Timing the conversion in a tax year in which your total anticipated taxable income will be lower may be beneficial if the tax cost is acceptable in exchange for the anticipated future tax-free appreciation.
4. Capital Gains and Losses: Review your investment portfolio and consider selling investments with unrealized losses to offset gains (loss harvesting). Capital losses can be used to reduce your overall taxable income but there are limitations.
- Maximize use of lower ordinary or capital gains tax brackets. A 0% long term capital gains rate can be accomplished for those with lower gross incomes in the current year.
- Contribution of appreciated stock prior to sale. Donating appreciated stock entitles you to a charitable contribution at the fair market value of the stock, and also avoids the capital gains tax that would apply if you otherwise sold the stock.
5. Required Minimum Distributions (RMDs): If you are 72 or older, make sure to take your RMD from qualified retirement accounts by December 31st to avoid penalties.
- Qualified charitable contributions instead of Required Minimum Distributions (RMD). After age 70 ½, individuals can execute charitable gifts (up to $100,000 per year) directly from retirement accounts to fulfill any RMD requirements and exclude the earnings from your taxable income concurrently. Note that the maximum increases in the year 2024 to $105,000.
6. Bunching itemized deductions. The standard deduction in 2022 is $25,900 for joint filers ($12,950 single). You may consider applying a bunching strategy to gather deductions into a single tax year in which you plan to exceed these thresholds while taking the standard deduction in the preceding and subsequent years.
- Charitable giving: Adjusted gross income limitations are back for 2023.
- Medical expenses: Remain subject to a 7.5% of adjusted gross income limitation.
- State and local taxes: Deduction is capped at $10,000 annually.
- Interest expense: Mortgage interest and investment interest can be subject to limitations based on the source of the funds and amount of indebtedness.
7. Gifts (cash or property) before year end. Make any gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give up to $17,000 in 2023 to each of an unlimited number of individuals under the exclusion. Transfers of income producing property also may reduce overall income taxes by shifting income to lower income tax family members.
- Keep in mind the current historically high lifetime exemptions from estate tax are scheduled to expire at the end of 2025. Consideration should be given to use of these exemptions to their fullest extent if your estate may be subject to an estate tax in the future.
8. Education Expenses: If you have education expenses, explore tax-advantaged accounts like 529 plans to save for education costs and potentially qualify for state tax deductions.
9. Evaluate Tax Credits: Review available income tax credits that apply to child and income limitations, energy incentives, and post-secondary education, to determine if you qualify and can maximize your savings.
• Make all scheduled estimated tax payments and consider increasing withholdings from available sources to minimize exposure to underpayment penalties.
• For those holding virtual currencies or other digital assets, review potential implications of exchanges for other digital assets, events that may result in taxable ordinary income, and what tax rates may apply.
• Count the rental vs. personal use days when your vacation home was used personally and rented to third parties as it may impact your ability to deduct the operating expenses for the home. Remember that short-term rentals (such as Airbnb) may NOT be considered a rental (but rather a business) and may be subject to other reporting requirements.
• Arizona state tax credit contributions. Dollar-for-dollar state tax credits to eligible organizations can be paid up until April 15, 2024 to receive a 2023 tax credit. For contribution limits and an overview of several popular Arizona tax credit programs, please review our summary on our website. Several of the contribution limits increased in 2023.
Always remember to retain documentation to support income and deductions. Ensure that you maintain accurate records and receipts for reportable activity.
Finally, we encourage you to schedule a year-end consultation to discuss your specific tax situation. We can perform a comprehensive review and tailor a tax strategy that aligns with your goals. Remember that tax laws and regulations are subject to change, so it’s essential to stay informed about any new developments that may impact your tax planning.
We are committed to assisting you in making informed decisions to minimize your tax liability while maximizing your financial health. Please do not hesitate to contact us to schedule your year-end tax planning consultation.
Subsequent changes in tax law, code, regulations, regulatory guidance, or other precedent may affect the statements above and must be reviewed with your tax advisor before taking any action. Careful consideration and an accurate analysis of the income tax implications of any potential action is highly advised.