2023 Year-End Tax Planning
Friends – This is my seventh sharing a year-end planning checklist and fortunately this edition comes at the end of a year that has been much kinder to investors than last year. After an extremely difficult 2022, equity markets have rallied significantly year-to-date, bond markets have stabilized and the economy has remained resilient despite predictions of an impending recession earlier in the year.
That being said, as there is every other year, there are significant and important opportunities for investors to consider before year end. Below are some of the top topics we are discussing with clients as we approach 2024. As always, if you are unsure about any of these topics in any way, please do not hesitate to reach out. I’m always happy to help.
- Harvest Tax Losses and Rebalance – Tax loss harvesting is one of the most timely opportunities to consider each year. Given the recent rise in interest rates, many investors now also have losses available to harvest in the bond portion of their portfolios, which can be more complex and should be considered carefully. Additionally, automating loss harvesting year round via direct indexing can significantly benefit investors.
- Take Advantage of Higher Interest Rates – The bright side of higher interest rates is the ability to earn more on your cash / savings and bonds now look like a very attractive investment option for the first time in many years. Make sure you’re getting the best return on your cash and properly diversifying your portfolio.
- Contribute MORE to 401(k)s, IRAs and other retirement accounts – As always, maximizing contributions to these accounts can reduce your taxable income and give your retirement savings a boost. The contribution limits for these accounts are indexed to inflation, which means after a big jump for 2023 limits are going up again next year – up to $23,000 to 401(k)s or $30,500 if you’re 50 or older in 2024. Limits for IRAs, HSAs and other important accounts are similarly higher in 2024.
- Take advantage of Health Savings Accounts (HSAs) – HSAs continue to grow in popularity and are still the best deal going to save and invest. You can read more about HSAs in one of my most recent blog posts.
- Plan for a Bonus – If you receive a portion of your compensation as a year-end bonus or have another lump sum to invest, review my previous post with tips on how to best allocate it.
- Revisit Roth Conversion Opportunities – If you’ve considered converting to a Roth IRA for any number of reasons, doing so at depreciated levels during a market pullback may prove advantageous. Backdoor Roth conversions also remain a good strategy. These decisions have complicated tax implications, so be sure to seek qualified advice before doing so.
- Assess Your Tax Efficiency – If you own mutual funds in taxable accounts, it is likely you’ll still receive some type of year-end capital gain distributions that you owe taxes on, even though markets are down – this can be avoided in the future. Not all investments are created equal in this regard and a careful review may identify opportunities to save on taxes going forward. I’ve written about assessing your portfolio’s overall tax efficiency previously.
- Take Required Minimum Distributions (RMDs) – If applicable, don’t forget to take required distributions from retirement accounts to avoid up to a 50% penalty on undistributed amounts.
- Give Thoughtfully to Charity – I’ve written about this topic in more depth in previous years. If you’re making any gifts in the near future, please review my tips on tax-efficient giving.
- Complete Annual Gifting – For investors who may have a taxable estate in the future, taking advantage of annual gifting limits to family members, trusts or other recipients can be an effective way to limit future estate taxes. In 2023 the gift tax limit is $17,000 per recipient or $34,000 for married couples. Tuition payments and medical expenses made directly to institutions can also be made above these limits.
- Re-Assess Withholding – If you have been surprised by a larger than expected tax bill in recent years, it may be due to underwithholding taxes from your paychecks as they are received. Working with your CPA and payroll department to ensure you’re withholding enough is important to avoid a surprise tax bill come April, or worse an additional underpayment penalty.
- Look Ahead to Future Years – The complexity involved with tax planning means it is no longer something that can be done one year at a time. Planning should now take a longer-term perspective and be thoughtfully coordinated over multiple tax years, whether through accelerating or deferring income, “bunching” deductions or other strategies.
Best,
CAMERON DIEHL, CFP®, CPWA®
Private Wealth Advisor
