As the final grains of sand slip through the hourglass of 2023, the specter of April 15 looms large. But fear not; careful tax planning can really pay off, boosting the overall returns on your investments by lowering the taxes you may have to pay. By making smart tax decisions now, and throughout the year, you can improve your household’s financial health. Here are 10 straightforward tax-planning steps to take before the year wraps up, which can lead to savings when Tax Day arrives.
1. Harvest losses to offset gains
Markets fluctuate; where there are winners, there are losers. If your portfolio has floundered, consider tax-loss harvesting — selling off underperforming investments to offset capital gains in taxable accounts.
This can balance the scales and reduce your taxable income. Remember, you can deduct up to $3,000 in losses beyond your gains, carrying over any excess into future years. A “loss carryforward” might benefit you in future years when gains occur.
2. Max out retirement contributions
The more you invest in your future self, the less you owe today. Maximizing contributions to retirement accounts like 401(k)s and traditional IRAs can reduce your taxable income. Alternatively, utilizing Roth 401(k)s and Roth IRAs may be a wise strategy to reduce taxable income in the future. For 2023, the limit for 401(k) contributions is $22,500 with an additional $7,500 for those 50 or older. IRAs allow $6,500 with a $1,000 catch-up.
3. Mind the RMDs
If you’re 73 or older, Required Minimum Distributions from retirement accounts are mandatory. Failure to take these can incur hefty penalties up to 25% of the RMD amount. Plan these withdrawals wisely to avoid unnecessarily inflating your taxable income bracket.
4. Contribute to a Health Savings Account (HSA)
HSAs are a trifecta of tax efficiency: Contributions are tax-deductible, the growth is tax-free, and withdrawals for qualified medical expenses are untaxed.
For 2023, you can contribute up to $3,850 for an individual or $7,750 for a family.
5. Ponder a Roth conversion
When income is lower than usual, converting a traditional IRA to a Roth IRA might be advantageous.
You’ll pay taxes on the conversion at a potentially lower rate, and future withdrawals from the Roth IRA will be tax-free, given certain conditions. Additionally, Roth IRAs can provide a unique benefit in your estate plan. Speak with your tax and estate counsel for specifics as it relates to your circumstances.
6. Bunch charitable contributions
The art of “bunching” involves consolidating multiple years of charitable donations into a single year to surpass the standard deduction and itemize your taxes. Consider pairing this strategy with a potential donor-advised fund to distribute your generosity over time while reaping immediate tax benefits.
7. Review Your Flexible Spending Account
FSAs are “use it or lose it,” so ensure you expend these funds on qualifying medical expenses before year’s end. Some plans offer a grace period or allow a carryover of up to $570; confirm with your plan administrator.
8. Gift generously
The annual gift tax exclusion for 2023 is $17,000 per recipient. Gifting can not only bring joy but also reduce your taxable estate. For those with larger estates, consider leveraging this exclusion to strategically transfer wealth and consult with your legal and tax professionals for details. Big changes are coming in this area in 2026.
9. Seize the gift tax exemption opportunity
The clock is ticking on the generous gift tax exemption limit set by the Tax Cuts and Jobs Act of 2017. As we anticipate the sunset of these terms at the end of 2025, now is the time to take advantage of the current $12.92 million federal gift and estate tax exemption. After 2025, this limit is expected to be nearly cut in half. By gifting now, you can reduce your taxable estate and avoid future estate tax exposure, which may impact more people than ever if the exemption amount decreases as scheduled. Act swiftly; this window of opportunity is closing, and 2023 is the perfect moment to make significant gifts that could keep on giving, tax-wise, for years to come.
10. Fine-tune your tax withholdings
If you anticipate a significant tax bill or refund, adjusting your withholdings now can prevent surprises come tax season. Work with your HR department and tax counsel to adjust quarterly estimated tax payments to align closer with your expected tax liability.
Each of these steps is more than just a task; it’s a crucial part of your tax strategy to ensure that you end 2023 on a strong financial note.
Tax-related opportunities may seem minor but are frequently neglected in thorough investment planning. Given climbing government deficits and debt, it’s prudent to prepare for a shifting tax landscape. Collaborating with your team of financial experts to make tax-wise choices aims to build future tax adaptability. By doing so, we take charge of the financial aspects within our power with the goal of minimizing any surprises later.
Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a retirement account. Tax laws are complex and subject to change. Steward Partners does not provide tax or legal advice.
Tom Sedoric is partner, executive managing director and wealth manager, and D. Casey Snyder is partner, senior vice president and wealth manager of The Sedoric Group of Steward Partners in Portsmouth. They can be reached at thesedoricgroup.com.
