Year End Tax Strategies 2023

Charitable Giving Strategies

Combining Charitable Deductions – The term “bunching” came into prominence once the Tax Cuts and Jobs Act (TCJA) became law in 2018, which nearly doubled the standard deduction and limited state/local tax itemized deductions to $10,000, thus affecting many who are charitably inclined as the number of taxpayers who itemized deductions significantly decreased.  The “bunching” strategy is to combine multiple years’ worth of charitable donations together into one tax year to allow a taxpayer to itemize deductions in that year to maximize the tax write off and then use the standard deduction in non-donating years.

Qualified Charitable Distributions (QCD) – For IRA owners 70 1/2 and older, you can distribute up to $100K directly from your IRA account to a qualified charity and not be subject to income taxes on that distribution.  The amount is excluded from your taxable income and conveniently, if you have a Required Minimum Distribution (RMD), it will count toward that annual amount.  As a refresher, the Secure 2.0 Act passed in the final days of 2022 pushed back the RMD age to 72 to 73; however, it left the QCD eligible age at 70 1/2.

Donating Long-Term Appreciated Securities or Real Estate – Gifting appreciated securities held for more than one year provides a tax deduction equal to their fair market value and can be up to 30% of donor’s adjusted gross income (AGI) if given to public charity, or up to 20% if donated to a private foundation.  If donations exceed these AGI thresholds, they can be carried forward and used for the next five tax years.  By gifting appreciated securities, there will not be any taxes owing on the unrealized gain and if you still want to own the security, simply repurchase new shares at a higher cost basis and potentially minimize your future tax liability when you sell it at a later date. Donating real estate can be equally beneficially from a tax perspective, providing the same “double tax benefit,” although has other considerations and complexities worthy of discussion.  Please contact your advisor if you are interested in learning more.

Estate and Gift Planning

Annual Gift Tax Exclusion – The federal annual gift tax exclusion amount is $17,000 per donor to each donee they desire to give to each year.  Married couples can use gift splitting to combine and double up their annual exclusion and gift up to $34,000 to any one person, and can gift to an unlimited number of donees.  Next year the annual gift tax exclusion will increase to $18,000.

One exception to the annual gift tax exclusion is the funding of a college savings 529 plan, which allows for up to 5 years’ worth of annual gifts of $85,000 for an individual, or $170,000 for a married couple, to be made in one tax year.

Lifetime Gifting – The TCJA substantially increased the lifetime gift, estate and generation-skipping transfer exemption to $12.92 million per person in 2023.  This is expected to grow to $13.44 million per person next year, or $26.88 million for a married couple.  The higher exemption is expected to sunset at the end of 2025 and will revert back to the prior $5 million limit, indexed for inflation, starting in 2026.  The IRS has stated its “anti-clawback” regulations for individuals taking advantage of the higher limits, should he/she pass in future years when the exemption is lower, which are beneficial for taxpayers.  This could result in substantial tax savings, assuming you are concerned about future estate tax liability.  If married, one idea could be using one spouse’s exemption to lock in the higher exemption, and more importantly keep the other spouse’s exemption and ensure there are enough assets for use during their lifetime.

Retirement Planning

Retirement Contributions – Remember to maximize and fully fund the IRS limits for defined contribution plans such as 401(k), 403(b), 457(b) and SIMPLE IRAs.  If you or your spouse actively participate in one of those qualified plans, you may still be eligible to contribute to a traditional or ROTH IRA dependent on your AGI.  Additionally, if you are enrolled in a Health Savings Account (HSA), remember to max out limits of your current situation, less any employer contributions made on your behalf.  Please see below for 2023 and a preview of 2024 limits:

Required Minimum Distributions (RMD) – Do not forget to take out your entire RMD before December 31, 2023 and avoid the recently reduced lower tax penalty of 25% (originally 50%).  As previously stated, RMDs now start at age 73, so if you turn 73 in 2023, the distribution can be delayed until the following year (April 1, 2024); however, another distribution is required by year end 2024.

Non-spouse IRA beneficiaries who inherited an IRA account from owners who passed away in 2020 and later already know about the requirement to fully liquidate within 10 years from date of death.  What the IRS has not yet finalized is any clarification if annual RMDs (assuming account owner already started RMDs) based on the beneficiaries’ life expectancy is also required.  In July, IRS Notice 2022-24 kicked the can forward by stating no tax penalties will be assessed on RMDs not taken, however, it did not provide guidance on any future RMD requirement.  Something to keep an eye on next year, for sure.

ROTH IRA Conversions  – Forever taxed to never taxed, anyone?  Typically toward year-end, there is more clarity on total annual income/tax brackets, which is key in determining if a ROTH conversion makes sense.  ROTH IRAs offer tax-free income in retirement without RMDs, but the kicker is paying taxes now on the conversion.  Without Congress intervening, the TCJA will sunset at the end of 2025 and income tax brackets will increase for most taxpayers.  If you anticipate higher income during retirement, completing a conversion prior to then could reduce your overall tax burden.  ROTH IRAs are also great wealth transfer vehicles as beneficiaries receive income tax free growth and tax free distributions.

Amazingly, the year has flown by again and the holidays will be here before we know it.  We hope the topics discussed give you some food for thought on your own unique circumstances and how you might benefit from engaging in some of the strategies covered.  If you want to get a jump-start on 2023 year-end planning, we are more than happy to discuss any of the above strategies and topics with you, just give your advisor a call and we will be glad to help!