As we approach the end of the year, it’s important to proactively manage your tax bill with strategies best implemented before December 31st. While Tax Day may still be months away, acting now can result in tax savings. Here are the top actions to take by December 31st:
Maximize your deductions by “bunching” charitable gifts to surpass the standard deduction, allowing you to itemize. Consider donating appreciated securities held for over one year to claim their full market value as a deduction (up to 30% of your adjusted gross income), sidestepping capital gains taxes. You may also want to consider using a donor advised fund which offers a unique opportunity to contribute a lump sum in one tax year, qualifying for a deduction while distributing funds to your charities over time.
If you’re aged 70.5 or above, consider using QCDs to direct up to $100,000 tax-free from your IRA to a charity. This approach satisfies your IRA required minimum distribution (RMD) obligation without increasing your taxable income.
Max out your 401(k) with contributions of $22,500 (or $30,000 if you’re 50 or older). Self-employed? You can contribute up to $66,000, or $73,500 if you’re 50-plus, including employer contributions.
Fund a Roth IRA directly or through a backdoor strategy, especially if you’re experiencing a low-income year. Converting some traditional IRA funds to a Roth IRA in an unusually low income year may pay off in future tax-free withdrawals.
If permitted by your workplace retirement plan, a so-called mega backdoor Roth allows high-income earners to save in a Roth account while eschewing the income limits of a Roth IRA and the tax consequences of a regular Roth conversion. To take advantage of this strategy, you first max out your normal, pretax 401(k) contributions for the year – then contribute after-tax dollars up to the overall account limit of $66,000 in 2023 ($73,500 for age 50 and older), after which you can convert those funds to Roth IRA. You’ll want to roll over those funds as quickly as possible to avoid being taxed on any additional investment returns.
For those over age 72, remember you may have a required minimum distribution from your retirement accounts. The RMD is an annual requirement and must be taken by December 31st of each year. Plan ahead of time to ensure the distribution occurs. To determine whether a required minimum distribution applies to you, please visit: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
Today, an individual can gift up to $17,000 per year to anyone through the annual exclusion. If you gift, you must file a gift tax return. The current lifetime exemption for individuals is $12.92 million to heirs free of federal gift/estate taxes; married couples can leave up to $25.84 million. Those lifetime exemption amounts are scheduled to be cut in half starting in 2026, so plan ahead.
The end of the year is a great time to make sure your portfolio is still aligned with your goals. If this year’s market volatility has left you with losses, you can use them to offset any realized capital gains for 2023. To employ this strategy, add up your gains, then sell losing positions of equal value. If you have more losses than gains, you can offset up to $3,000 of ordinary income.
Lower your taxes by deferring income to next year and accelerating deductions like bunching charitable donations or medical expenses into the current year.
If your company issues NSOs, which are taxed as ordinary income when exercised, waiting until the end of the year allows you to exercise just enough to stay within your tax bracket, thereby keeping your taxes lower than if you had exercised your options all at once.
Those with vested ISOs may find it is advantageous to exercise a portion of their options. Consult with your CPA to perform a breakeven analysis, which can guide you on the optimal number of options to exercise without triggering Alternative Minimum Tax (AMT). Keep in mind, each taxpayer is entitled to an AMT exemption annually—make strategic use of this benefit if you’re optimistic on your company’s prospects.
Schedule a meeting with your financial, tax, and estate planning professionals to discuss taking advantage of these strategies before year-end. We’re always mindful of these strategies when we plan with our clients and bring them up in discussion as needed.
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