Year-End Tax Considerations

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It seems like this year has flown by faster than ever!  With the end of the year upon us, it might be prudent to consider financial decisions that may require action before December 31st.

Max Out Retirement Contributions

If you have taxable working income, pre-tax contributions to your employer sponsored retirement account can both reduce your income taxes and provide the benefit of tax-deferred growth. For retirement plans like a 401(k) or 403(b), retirement savings contributions are typically taken directly out of your paycheck.  If you haven’t maxed out your contributions, you can increase your paycheck withholdings through the remainder of the year to reach the upper limit. In 2023, the maximum you can contribute is $22,500. If you are age 50 or older, you’re eligible for an additional $7,500 of catch-up contributions, raising your total employee contribution to $30,000

If you don’t have a 401(k) or 403(b), you can contribute to a traditional IRA or Roth IRA. For 2023, the maximum contribution you can make to your traditional IRA or Roth IRA (combined) is $6,500 (or $7,500 for those age 50 or older)[i] If your household income is too high, that may reduce how much you can contribute.

Take RMDs

Under the SECURE Act 2.0, beginning in 2023, the age in which you must start taking Required Minimum Distributions (RMD) increased from age 72 to age 73. SECURE 2.0 also pushed the age at which RMDs must start to age 75 starting in 2033. However, for this year, if you are age 73 or older, you have to take an annual Required Minimum Distribution (RMD) from most of your traditional retirement accounts. You can withdraw more than the minimum required amount, but if you miss taking your RMD before December 31st, you could face a 25% excise tax on the amount you should have taken out. For those turning age 73, for the first year only, they can defer taking their first RMD to April 1st of the following year. If electing to defer the first RMD, keep in mind that you’ll be required to take the first and second RMDs in the same year, which may increase your taxes for that year.

RMDs are generally taxed as ordinary income. If you do not need the RMD for cash flow and are charitably inclined, consider donating directly from your retirement account to a qualified public charity.  Doing so would fulfill your RMD requirement, and the donated money would allow you to avoid ordinary income tax on the donated amount, win-win! This type of donation is called a Qualified Charitable Distribution (QCD). Although the starting age for RMDs has been pushed back to age 73, you can still make QCD gifts as early as age 70½.

Roth 401(k) and 403(b) plans are subject to RMDs for 2022 and 2023. However, under SECURE 2.0, starting in 2024, RMDs will no longer be required from these designated Roth accounts. Roth IRAs do not require withdrawals until the death of the owner.[ii]

Harvest Losses

2023 has been a rollercoaster investment year, which can present a lot of investment opportunities. Tax-loss harvesting is a strategy of selling investments that are in a loss position to realize a tax savings. The losses can be offset against capital gains in other parts of your portfolio, dollar for dollar, reducing your tax expense. If you do not have capital gains this year, the IRS will allow you to apply $3,000 of the losses to offset income annually, and roll forward the unused remaining losses to future years until they are fully utilized.

An important IRS rule to keep in mind when tax-loss harvesting is the wash-sale rule. This rule disallows the tax benefits of loss harvesting if the investor buys back the same, a substantially identical investment, or even an option to buy such securities as what was sold to yield the loss, within a window of 30 days before and 30 days after the capital loss is realized. 

Finally, tax-loss harvesting can only be transacted in a taxable account. You cannot loss-harvest in a tax-advantaged account such as an IRA, SEP IRA, employer sponsored plan, or 529 plan.

Consider Conversions

While there are income limits to open and contribute to a Roth IRA, a conversion from a traditional pre-tax IRA to an after-tax Roth IRA can be done at any income level.  If the stock market is down, that may present an opportune time to shift assets from a pre-tax bucket to the after-tax investment bucket, allowing market recovery to occur in the tax-free Roth IRA.  Further, say you were an actor or union worker on strike and you have abnormally lower income this year. That may present an opening for you to do a Roth conversion, and not push you into a higher income tax bracket than you are accustomed. 

Be mindful that transfers from an IRA to a Roth IRA are taxed at ordinary income rates in the year of transfer.  Consult with your CPA prior to initiating any conversions.

Bunch Deductions

In 2023, the standard deduction is $13,850 for single filers, or $27,700 for those married filing jointly.[iii] Additionally, to qualify to itemize certain expenses, you often need to meet a certain threshold. For example, to deduct your medical expenses in 2023, your aggregate medical costs have to exceed 7.5% of your adjusted gross income (AGI). For this reason, the tax strategy of bunching, or aggregating expenses into a single year to meet the threshold to itemize expense, has emerged. If you have been delaying certain medical or dental expenses, or you have been considering charitable gifts, you might want to consider doing these before year-end. Other expenses that might qualify as itemized deductions could include qualified mortgage interest, including points for home buyers, or investment interest expenses (that are lesser than or equal to your net investment income).[iv] For more help with timely tax savings strategies, or guidance on navigating the recent changes from SECURE 2.0, consider working with a Certified Financial Planner™ or CPA with a Personal Financial Specialist credential to ensure you are on the right track. Happy Holidays and best wishes for the new year!





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