2023 End of Year Tax Planning Checklist

As the year draws to a close, we must make tax-aware decisions before the ball drops and we hit our tax deadline for 2023.  A few annual items to review include reviewing qualified plan contributions, annual gifting and gifting deadlines, and tax bracket management.  Then, we have an assortment of one-offs or end-of-year planning items specific to 2023.

Gifts:

Many folks give end-of-year cash gifts during the holiday season; while this can be a great way to give gifts, monitor when these gifts are cashed, and coordinate the gift giving as needed.  We have received somewhat surprising guidance from the IRS that a check given during the holidays but cashed during the new year will be treated as a gift in the year it is constructively received, not the year it is given.  If checks are not cashed until the new year, the donor may be forced to file a surprise gift tax return if they gift more than the limit for the year.

Retirement Planning Contributions:

Retirement planning contribution limits are updated annually, so withholdings must be readjusted each year if you plan to max out your contributions to a specific account for the year.  In 2022, the 401(k)-contribution limit was capped at $20,500, while in 2023, it was revised to $22,500; anyone who wanted to max out this retirement account would have had to increase their monthly contributions by $167 a month or would need a $2,000 payment in December to make up the difference.  It is also worth reviewing savings goals versus actual savings, as 12/31/2023 is the last opportunity to contribute to qualified plans for the year.  You can contribute to your IRAs until that year’s tax filing deadline, offering more flexibility.

Tax Bracket Management:

During the transition to retirement, we may have several low tax years sandwiched between a client’s highest earning years and their highest spending years in retirement.  We want to ensure we fill up the lower tax brackets here by executing Roth conversions and realizing capital gains while in a low bracket.  Conversely, taxing loss harvest at an effective 0% tax rate isn’t beneficial as we would instead deduct losses from income in higher tax brackets than lower ones.  Many of these moves are most effective at the end of the year when we have a clear picture of what taxable income has been for the year.

FSA:

We suggest being mindful of other end-of-year items, including ensuring you use up any remaining FSA balance.  Your FSA has what’s referred to as use it or lose it dollars, and while they claim to be flexible, these account balances may be forfeited at the end of the year if they aren’t spent.  You can stock up on over-the-counter medication, feminine products, and sunscreen to spend these balances down if needed.  Your employer may permit you to carry a few hundred dollars into the new year, but these provisions are not widespread.

One last reoccurring end-of-year tax planning topic to focus on before we get into the one-offs.  Taxes are generally lower today than they will be in 2026.  Current taxes will increase across the board for up to ¾ of taxpayers following the sunsetting of the Tax Cuts and Jobs Act of 2017.  The tax rate is set to revert to TCJA levels, but the devil you know is better than the one you don’t, and we won’t claim to know where tax rates will land following an election year.

Unique 2023 end-of-year tax planning and oddballs we find interesting that may affect you:

Crypto losses are not subject to wash sale rules: With typical investments, you cannot sell an investment, rebuy the same fund/stock/product within 30 days, or write off any booked losses.  This prevents investors from selling high and buying back into the same strategy at a lower point immediately after.  Investors must purchase a “substantially different investment.” However, crypto is not subject to these rules (yet), so anyone with crypto losses should likely sell their position and book the losses before the end of the year and then buy back into their position hours later.

Clean Vehicle Credit Clawback: There are tax credits of up to $7,500 for buying a new EV vehicle.  These are contingent on the adjustable gross income of the individual/couple.  These credits are rebatable, meaning that the dealership can take that credit from you in exchange for a $7,500 purchase price reduction.  We see an issue potentially arising if the purchaser has a better-than-expected year and ends up over the income threshold.  The dealership will then come after the purchaser for the additional uncollected rebate.  We don’t foresee this being common, but we want you to be aware of it!

529 to Roth IRA distributions: The only significant shortfall of 529 plans is that if the funds are not used for qualified higher education expenses, then the funds are subject to tax on any growth and a 10% penalty on distributions.  Because of this, many parents have chosen not to fully fund their kids’ education through these tax-advantaged accounts and instead look at less efficient options where they could get their money back without a penalty.  However, starting on January 1st, 2024, 529 funds can be distributed from the account to a Roth IRA for the 529 beneficiary up to a maximum of the Roth IRA limit of $7,000 so long as the beneficiary has earned income.

FAFSA Updates: While this is only pertinent to those with kids approaching college, it’s worth mentioning that the FAFSA is likely getting the most extensive overhaul of your lifetime, so there are a couple of highlights to be aware of.  The discount for having multiple children in college has gone away, as has relief for small business owners and farm owners, which now must be included in the FAFSA application, making less aid available.  However, the overhauled FAFSA will increase Pell Grant eligibility significantly, helping more low-income families pay for college.

New for 2024:

There are some important changes to retirement account limits and other government-limited accounts that will be updated in the new year, so let’s take a peek at these updates.  Many of these accounts will update their contribution limits with inflation, and over the past 12 months, this has been huge.

Contribution limits for 2024:

  • Qualified plans such as 401ks, 457s, and 403bs have contribution limits of $23,000 and catch-ups of $7,500.
  • IRA limits, too, have increased to $7,000 with a $1,000 catch-up for anyone over 50.
  • HSA or Health Savings Account’s limits have been increased to $4,150 for a single person and $8,350 for a married couple with catch-up contributions of $1,000 annually over 50.
  • The social security wage base has also increased to $168,600.
  • The Standard deduction is up to $14,600/$29,200 for those filing single/married filing jointly.

 

Traverse Planning is a dba of Clear Creek Financial Management, LLC a Registered Investment Advisor  This commentary reflects the personal opinions, viewpoints and analyses of Traverse Planning, and should not be regarded as a description of advisory services provided by Traverse Planning or performance returns of any Traverse Planning investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this analysis constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.  Traverse Planning provides strategies for estate and / or tax planning. These strategies do not constitute tax or legal advice. Consult legal or tax professionals for specific information regarding your individual situation.

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