2023 Year End Tax Planning – Individuals
The end of the year is a time for celebration, connection, renewal, and optimism for the future. It is filled with holiday celebrations, extended time with loved ones, and a chance to disconnect from the daily routine. However, it is also a chance to take advantage of opportunities that can save tax dollars now and in the coming year. Tax saving strategies include maximizing retirement plan contributions, increasing charitable contributions, prepaying educational expenses, and others. While the impact will vary based on each taxpayer’s situation, making even one of these or other moves before year end could add to significant savings. To help clients, prospects, and others, Klatzkin provides a summary of some tax savings strategies below.
Year-End Tax Planning Tips
- Maximize Retirement Plan Contributions – One easy way to reduce taxable income is to make additional contributions to a tax-advantaged retirement account such as a 401(k), 403(b), or Individual Retirement Account (IRA). Since these are funded with pre-tax dollars, any contributions made directly reduce an individual’s taxable income. For 2023, the maximum contribution to a traditional IRA or 401(k) plan is $22,500 (with an additional $7,500 in catch-up contributions for those 50 and older). Even if the maximum amount is not attainable, any additional contributions made will be beneficial. Remember that all 401(k) and 403(b) contributions must be made by December 31, 2023.
- Roth IRA Conversion – Making this conversion is most beneficial when an individual’s tax rate is expected to be higher in retirement than it is currently. There is a current-year tax cost for making a conversion because it is treated as a taxable liquidation of an IRA. While the initial tax bill is not welcome, it could be a small price to pay when considering future tax rates. Delaying a conversion could mean paying even higher tax rates in the future. The good news is all future contributions made are tax-free. There are additional benefits from converting pre-tax accounts to Roth accounts.
- Prepay Educational Expenses – There are two federal tax credits available to taxpayers who pay educational expenses for themselves, a spouse, or a dependent. They include the American Opportunity Credit and the Lifetime Learning Credit. The former provides for a credit of up to $2,500 with $1,000 of the credit refundable in some cases for the first four years of post-secondary education. The latter provides for a credit of up to $2,000 for qualified educational expenses including graduate-level courses. Certain states also offer credits for funding education accounts.
- Tax Loss Harvesting – This strategy helps to reduce the amount of taxes that need to be paid on investments. Taxpayers can offset capital gains with capital losses. Capital gains arise when an investment is sold for more than the taxpayer paid; capital losses are the exact opposite. Since taxes are paid on net capital gains, strategically timing investment sales to create enough capital loss to offset gains can be a powerful way to reduce income tax. Unused losses can also be carried forward to future years for federal and some state tax purposes.
- IRA Charitable Donations – IRA owners that are 70 ½ and older are allowed to make cash donations of up to $100,000 annually to an IRS-approved public charity from an IRA. Known as Qualified Charitable Distributions (QCDs), these amounts are not subject to federal individual income tax. The contribution is equal to a 100% tax deduction regardless of whether the individual can itemize deductions or not. Also, the income-limiting medical deduction threshold is reduced for those itemizing as well as for those who might be subject to the Income-Related Monthly Adjustment Amounts (IRMMA) for Medicare Premiums.
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Year-end tax planning is an important process that individuals should seriously consider. These are just a few of the strategies to consider. The effectiveness of any of them will be highly dependent on the taxpayer’s situation. If you have questions about the information outlined above or are interested in learning about year-end tax planning opportunities, Klatzkin can help. For additional information, call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.