To borrow a baseball metaphor, the year 2023 is “rounding third and heading for home.” Typically, this is the time of year when you should start looking at your income for the year and considering what might be needed to be ready for filing your 2023 tax return, next April. Even though most of the year is already in the books, there are still some things you can do to avoid paying more than necessary. And in this particular year, some potential changes on the tax-law horizon make it important for high-net-worth individuals to evaluate their financial plan. Let’s take a look.
- Defer income, accelerate deductions. This is one you probably hear every year, and with good reason: the less income you have to report, the lower your marginal rate; and the more you can deduct, the less you need to send to Uncle Sam. Most taxpayers aren’t likely to see big changes in their marginal rates in the near future, so if you can delay sales of assets or reception of bonuses and other income until after January 1, you’ll save on taxes owed in 2023. As far as deductions are concerned, many taxpayers are better off simply claiming the standard deduction for 2023 ($13,850 for single filers, $27,700 for couples). But you may have the option of making two or more years’ worth of charitable deductions in a single year; this could provide a bigger reduction to taxable income than the standard deduction. You may wish to investigate a donor-advised fund as a way to channel various types of assets (including appreciated stock, real estate, and others) to benefit a favorite charity. The fund can accept the assets, generating a deductible gift, and then make a payment to a charity of your choice.
- Review your capital gains. If you are on track for significant capital gains in your taxable investment accounts, you may want to discuss tax-loss harvesting with your financial advisor. By selectively accepting losses in some areas, you may be able to partially offset gains in other areas, reducing your capital gains tax liability.
- Retirees, look at your RMDs. If you turn 72 or older in 2023 and you have traditional IRA, 401(k), or 403(b) accounts, you must take required minimum distributions (RMDs). Failure to withdraw the correct amount from these accounts can result in a stiff penalty from the IRS. If you have an IRA, you don’t really need the income, and you’d prefer not having to pay tax on it, you might want to consider a qualified charitable distribution (QCD), which allows you to make a donation to a qualified charity, directly from your IRA.
- Max out your retirement plan contributions. If you’re still working, use the last three months of the year to contribute the maximum amount to your tax-advantaged retirement accounts (IRAs, 401(k)s, 403(b)s). In 2023, you can contribute up to $22,500 to your 401(k), and if you’re 50 or older and your plan permits it, you can add another $7,500 onto that. If you have at least $6,500 in earned income, you can contribute up to that amount to an IRA ($7,500 for those 50 and older; limits may apply to your available IRA deduction, depending on your income). If you are eligible to contribute to a health savings account (HSA), you should consider putting in at least the amount of your health insurance deductible. Like other tax-advantaged accounts, growth of funds in HSAs is not taxed, and you can withdraw money at any time to pay for qualified medical expenses without paying tax. Balances in HSAs can also be rolled over from year to year, allowing you to save more for future medical expenses on a tax-advantaged basis.
- Watch the “sunset.” For high-net-worth investors, it’s important to remember that many of the provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 are scheduled to end in 2025. Unless Congress acts to prevent it, some of the changes in 2025 could include:
- Higher individual tax rates;
- Lower exemption levels for alternative minimum tax (AMT);
- Lower exemptions from estate and gift taxes.
For individuals and estates with net worth in excess of about $6 million, the third item is of particular concern. TCJA nearly doubled the exemption from estate taxes, to $11.18 million (the rate is $12.92 million in 2023, adjusted for inflation; the rate for couples is roughly double that amount). But this provision, along with other aspects of the act, is scheduled to expire at the end of 2025. Persons and estates near or above the previous limit may suddenly find themselves in the position of owing estate taxes, based on the lower exemption rate. Because any legislative remedy for this situation is uncertain at best, those with sizeable estates are well advised to consider strategies for reducing the size of the taxable estate in advance of the 2025 sunset. Among other methods, they may wish to utilize current gifting guidelines to transfer assets to intended heirs. Current law permits an individual to gift up to $17,000 per year ($34,000 for couples) to one or more persons without imposition of gift taxes. Further the recipient of a properly-structured gift generally is not required to report the gift as income (unless it comes from a foreign source). This is just one way that high-net-worth persons or estates may be able to reduce the size of the taxable estate prior to the potential sunset of the higher exemption in 2025. They may also wish to consult with their financial and tax advisors and review their current estate planning documents, including trusts, wills, and others.
These are just a few of the key matters to consider before the end of calendar year 2023. At The Planning Center, our fiduciary obligation to clients ensures that we help them stay abreast of changes in tax and investment law in order to provide up-to-date guidance for their financial planning. To learn more about how we provide a safe place for you to discuss your most important financial goals, visit our website.