Tips for 2023 Year End Tax Planning
By: Brian Seay, CFA
TAX TIME IS NOW! Not in March of next year. Now is the time to start thinking about strategies to manage your 2023 taxes and it’s also a great time to find professional support to help prepare your tax returns. After the calendar page turns to the new year, CPAs quickly book up and it becomes difficult (if not impossible) to find tax guidance before the end of April. Below are a few tips to jumpt start your thinking. We recommend discussing your specific situation with your investment and tax advisors. If you don’t have an advisor, feel free to reach out to our team to discuss further!
Tax loss selling in Bond Portfolios
Many investors actively sell stocks that have fallen in price to realize the capital loss on their taxes. However, bonds are not typically volatile and thus investors forget about them when they consider tax loss selling. Year-to-Date, the Bloomberg US Long Government/Credit Index has fallen just over 4% for the year. Your total bond portfolio may be down modestly but consider selling longer term bond holdings with losses that could be realized to reduce your taxes. Remember, tax loss selling is not a reason to exit holdings. You should consider reinvesting into similar bonds immediately after selling to realize the loss.
Maximize retirement account contributions
Often investors with a 401k plans at work forget they can also save using an IRA and vice versa. Each person can defer income on contributions in a 401k or 403b plan of up to $22,500 ($30,000 age 50+). In an IRA, each person can defer income on contributions up to $6,500 ($7,000 age 50+). If you own a business or contribute to another type of retirement plan, you may be able to defer even more income by making both the maximum employer and employee contribution. Check with your advisor and plan to ensure you are maximizing the benefit of your retirement accounts for 2023.
ROTH Conversions and “Backdoor” ROTHs
ROTH IRAs are especially useful when an individual expects their tax rate or a specific asset’s value to increase substantially over time. Taxes are paid on ROTH contributions and conversions in the current year, and, in exchange, assets grow and may be distributed tax-free after you reach retirement age. In a ROTH conversion, assets are distributed from an existing IRA (or 401k) to a ROTH IRA to take advantage of future tax-free growth. ROTH IRAs have income limits that prevent high-income earners from contributing directly to the accounts. A “Backdoor ROTH” is used by higher income earners who contribute after-tax dollars to an IRA or 401k and subsequently distribute the funds to a ROTH. Smart management of your taxable (401k/IRA) and tax-free (ROTH) assets is key for achieving the lowest possible long-term tax burden.
Required Minimum Distributions from retirement accounts
Remember that individuals generally must begin taking the required minimum taxable distributions from 401ks and IRAs at age 73. The Secure Act of 2022 made changes to the rules for individuals about to hit RMD eligibility and for certain qualified beneficiaries of IRAs. For more on those specific changes, see our full article on the Secure Act 2.0.
CHARITABLE GIVING FROM YOUR IRA
If you are already retired, and over age 70½, your IRA is a great source of funds for charitable contributions. Qualified charitable distributions (QCDs) from your IRA count towards your required minimum distribution (RMD) and the income is deductible as a charitable contribution. This is a great way to minimize taxable income in retirement if you have other sources of funds outside your IRA. So spread a little holiday generosity for others!
Manage your taxable income
Everyone often forgets this simple, highly effective strategy! Review projected taxable income for 2023 and 2024. If you own a business or manage a partnership with some control over your personal income, consider accelerating or deferring income. This is especially true if your business income tends to be high in some years and low in others. You may be better off paying a smoothed-out tax rate rather than an extraordinarily high rate in one year and a lower rate the next. If you are on the border between the AMT (alternative minimum tax) and regular tax rates, consider controlling your income and deductions to improve your overall tax outcome.
SMART STRATEGIES FOR STOCK OPTIONS AND COMPANY STOCK
If you can choose when to exercise stock options, 2023 may be a good year to exercise. You may have losses elsewhere, especially in your bond portfolio, to help offset the additional income. Also, if you have ISOs (incentive stock options) now may be a good time to kick-off the 1 year holding period that’s required to receive preferential capital gains tax treatment after you exercise your options.
Remember, this is not an exhaustive checklist. It’s meant to be a starting point to spur a deeper conversation between you and your advisors. If you have questions, or would like to discuss tax strategies further, please schedule a time to connect with our team!