• Seven things to consider for year-end tax saving and planning

    by Badgley Phelps | Nov 02, 2023

    We’re well into the fourth quarter, and 2024 is just around the corner. You’re likely focused on upcoming holidays and the new year—but now is also a critical time to think about financial planning. Following are seven things to consider; you can also download our 2023 year-end financial checklist.

    1. Tax-loss harvesting & Washington state capital gains tax

    2023 hasn’t provided as much opportunity for tax-loss selling as we saw last year. However, we have seen a very bifurcated market this year, and there may be opportunities in certain sectors and positions. Selling certain taxable investments at a loss could offset any capital gains you’ve realized during the year. If you have underperforming positions that would generate a capital loss, consider selling them prior to the end of the year to offset realized capital gains. If your losses exceed your gains, you can use up to $3,000 of the excess losses to offset your ordinary income. Any additional losses beyond the $3,000 annual limit may be carried forward for use in future years.

    It’s important to recognize that for Washington state residents, only long-term capital losses can be used to offset long-term capital gains. To qualify as a long-term capital gain, the investment must be held for at least 365 days. Short-term capital losses cannot be used to offset capital gains for Washington state capital gains purposes. Apart from certain exemptions, Washington state capital gains tax will apply on capital gains exceeding $250,000.

    When using this strategy, be aware of the IRS “wash-sale” rules which prevent you from deducting losses on the sale of a security if you buy back the same security within a 60-day period—30 days before the sale and 30 days after the sale.

    2. Required minimum distributions

    The age to begin required minimum distributions (RMDs) was raised this year. As of 2023, if you are over age 73, you will need to take your RMD before the end of the year. For individuals turning 73 this year, you technically have until April 1, 2024, to make your first distribution, but it is generally advisable not to wait, as you will still be responsible for making your second distribution in 2024. In other words, delaying your first distribution to 2024 would result in double distributions in one year. Required minimum distributions apply to all types of tax-deferred retirement accounts with two exceptions; one being employer plans for those working past age 72 and who are less than 5 percent owners of their business, and the other for inherited IRAs that were inherited on or after January 1, 2020. Missing your RMD will result in a 25 percent penalty imposed by the Internal Revenue Service (IRS), so it is important to make all required minimum distributions before December 31, 2023. While this penalty was lowered significantly in 2023 (down from 50 percent), penalties can still be significant.

    3. Flexible spending accounts

    Don’t forget the funds you set aside in your flexible spending account for 2023. These funds are used for expenses related to the special purpose of the fund. The accounts may pay for eligible medical, dental, vision, and/or dependent care costs. Verify the rules under your plan to determine if you may roll over unused funds into 2024. If your balance exceeds the permissible rollover amount, plan to spend the balance on qualified expenses before the end of the year.

    4. Defer income and accelerate expenses

    Income you receive in 2023 is considered taxable in 2023. If your employer allows you to defer your year-end bonus, consider deferring some income from 2023 to 2024. The delay of the sale of capital-gain property and receipt of distributions in 2024 can also help reduce this year’s taxable income. Deferring into the next tax year only makes sense if you expect to be in the same or lower tax bracket for 2024.

    Since the Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction, fewer taxpayers itemize their deductions—a game changer for many who previously itemized deductions. For some taxpayers, it may make sense to strategically accelerate and pre-pay certain tax-deductible expenses—bunching into a single year what you had planned to pay over two years—and benefit from itemized deductions this year and not next year. Boosting your total itemized deductions beyond the standard deduction will also allow you to deduct part of the medical and dental expenses you have paid. Consider pre-paying qualified medical expenses—the threshold for qualified medical expenses for 2023 is 7.5 percent of your adjusted gross income (AGI). This threshold was scheduled to increase to 10 percent beginning 2021; however, Congress has elected to maintain the 7.5 percent threshold.

    5. Gifts and donations

    During the holiday season, it seems timely to make gifts to support your favorite charitable organization and realize deductions, and/or give to loved ones and maximize your annual gift exclusions.

    The most common type of charitable contributions are direct cash gifts; however, gifting appreciated stock to your favorite charity may provide additional tax benefits. Not only will you be able to take an income tax deduction for the fair market value of the stock, but you will also remove this stock’s accumulated capital gains from your portfolio. Another option is the QCD strategy for taxpayers over 70½. A qualified charitable distribution (QCD) counts toward your annual RMD for those over age 73 and is excluded from your taxable income so long as it does not exceed the annual $100,000 limit. An advantage of the QCD strategy over the other options is it directly reduces taxable income rather than being subject to the standard deduction. It is important to note that in order to be a QCD, the donation must be made directly to a charity from your retirement account. Congress expanded the flexibility around QCDs in 2023; however, notably, contributions to donor advised funds (DAFs) still do not qualify. The expansion provides for a one-time qualified donation to charitable remainder trusts and charitable gift annuities up to a limit of $50,000.

    Because of the increased standard deduction, many charitable givers may no longer receive a tax benefit from their normal charitable giving. Although this is technically related to bunching your itemized deductions, charitable giving may be one of the easiest ways to reduce your taxable income by pulling future years’ charitable giving into the current tax year. DAFs are a handy tool for charitably inclined, tax-savvy individuals. Consider making an irrevocable donation, equal to several years’ worth of charitable gifts, to a DAF before the end of the year. You can deduct the entire donation in the current tax year and control the disbursements to the charities of your choice over multiple years.

    For estate planning purposes, in 2023, the IRS allows you to make tax-free gifts of up to $17,000 per year ($34,000 for married couples) to as many individuals as you’d like. These gifts will not be subject to federal gift taxes and will not be considered taxable income for the recipient. Apart from making direct cash gifts, consider contributing these tax-free gifts to a 529 plan for your children/grandchildren. Contributions to a 529 plan grow tax-deferred and withdrawals used for eligible educational expenses are tax-free.

    Additionally, a special provision of 529 plans allows you to front-load the plan using an accelerated gifting schedule by contributing a lump sum of $85,000 ($170,000 if married filing jointly) in the first year of a five-year period without creating a taxable gift. This clearly amplifies the wealth transfer potential and is worthy of careful consideration. For example, a married couple with four grandchildren could reduce their taxable estate up to $680,000 by contributing to four separate 529 plan accounts without consuming part of their lifetime gift exemption.

    6. Roth conversions

    If you’ve thought about taking advantage of the market’s volatility to convert all or part of your traditional IRA or retirement plan assets, enough of the year has passed that you should be able to project the potential tax impact. Roth conversions can be helpful for two reasons: First, there may be future tax benefits to doing a conversion now if you expect your future income to be taxed at a higher rate, such as avoiding the "tax torpedo"— a sharp rise in a taxpayer’s marginal tax rate caused by the taxation of social security benefits and required minimum distributions from IRAs at age 73—or to mitigate the effect of Medicare premium surcharges on high-income retirees. Other factors to consider include your current and anticipated future income tax rates, when you begin to withdraw, and your time horizon. Second, as an estate planning consideration, it may make more sense to leave your Roth IRA assets to your heirs and traditional IRA assets to charities. As each person’s income tax experience can vary significantly, it is best to consult with your professional advisors to understand your options and carefully consider the consequences before you decide to convert all or part of your traditional IRA or retirement plan assets. The ability to make a Roth conversion has been on the political chopping block for some time; if you have been considering a Roth conversion, now could be the time.

    7. Financial checklist

    In addition to the year-end strategies above, consider making and reviewing an annual financial checklist. As a starting point, you can download our  sample financial checklist. This is particularly important if you or your family have experienced any major life events this year, such as marriage or divorce, births or deaths, or a job change—or have major life events on the horizon. These uncomplicated tasks can prevent serious consequences if otherwise overlooked.

    Our financial planning team is also here to help—contact us today.


    Originally published on November 1, 2023


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