By: Lisa M. Wood, CPA, MT – Director of Tax
Prepare for the upcoming tax season by considering these strategic tax moves before the end of the year!
Check your payroll income tax withholding
It is always a good idea to check your federal and state income tax withholdings before the end of the year to avoid an unexpected tax bill next spring. In 2020, the IRS changed Form W-4. Instead of claiming withholding allowances, you can now estimate your tax liability to calculate withholding more accurately. You also can indicate a specific amount you would like to increase or decrease your withholding amount. If you need to make any adjustments to withholding, file an updated Form W-4.
The IRS has a tax withholding estimator tool here: https://www.irs.gov/individuals/tax-withholding-estimator. Form W-4 is available on the IRS website here: https://www.irs.gov/pub/irs-pdf/fw4.pdf. Ohio’s withholding form can be found here: https://www.tax.ohio.gov/static/forms/employer_withholding/generic/wth_it4.pdf.
Maximize your retirement contributions
You can reduce your taxable income by contributing the maximum amount to a tax-advantaged retirement plan. In 2023, the maximum contribution an employee can make to a traditional §401(k), a §403(b), most §457 plans and the federal government’s Thrift Savings Plan is $22,500. The catch-up contribution for participants aged 50 and over is an additional $7,500. Therefore, employees at least 50 years old can contribute up to $30,000 to these plans.
If your employer has the option, you can contribute to a Roth 401(k). Although this will not reduce your current year taxable income, your contributions and earnings can be withdrawn tax-free once you reach age 59 ½ provided the account has been open for at least five years.
If you cannot make the maximum contribution to your employer sponsored plan, at least try to contribute the amount your employer will match. All employer-sponsored plan contributions must be made by December 31, for that calendar year.
Annual contributions to an Individual Retirement Account (IRA) are $6,500. The catch-up contribution for individuals aged 50 and over is $1,000. You have until the filing deadline in April 2024 to contribute for the 2023 tax year.
Take any required minimum distributions from traditional retirement accounts
You must take required minimum distributions (RMD) from tax-deferred retirement accounts by the end of the year if you are age 73. This includes traditional IRAs, SEP IRAs and SIMPLE IRAs. If you inherited a tax-deferred retirement account, you may need to start taking distributions now rather than waiting for retirement. Missing the annual deadline may result in a 25% penalty (reduced to 10% if corrected within 2 years) on the amount you should have withdrawn. If you turned 73 in 2023, you have until April 1, 2024, to take the first RMD. However, this will result in taking two RMDs in 2024 (one for 2023 and one for 2024) so it is important to project the tax impact of waiting until the following year to take the distribution.
Consider Roth IRA conversions
You can convert pre-tax savings in a traditional retirement account to a Roth IRA. The withdrawals then are tax-free at retirement. Converting assets to a Roth IRA is a taxable event so it is important to plan the timing and amounts of the conversion to minimize the tax impact.
Harvest investment losses to offset gains
This is a good time of year to make sure your investment portfolio is aligned with your investment goals. Tax-loss harvesting is when you sell investments at a loss to offset other capital gains and lower your tax liability. If your tax losses exceed your gains, you are permitted to deduct up to $3,000 ($1,500 if married filing separately) to offset other income. For this strategy to be successful, you must track tax losses across your entire portfolio and also monitor market fluctuations. You should work with your investment advisor to determine the appropriate assets to sell and the timing.
Health Savings Accounts contributions
Health Savings Accounts are available to individuals with High Deductible Health Plan insurance coverage. It allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. You have until April 15, 2024, to make contributions for the 2023 tax year. Contribution limits are $3,850 for an individual and $7,750 for family coverage. There is an additional $1,000 catch-up contribution for those age 55 and older.
Optimize Charitable Giving
Donations to qualified charities are an itemized deduction and can be worth up to 60% of your adjusted gross income. Donating long-term investments that have appreciated in value directly to the charity is an extremely tax efficient strategy. You exclude the capital gain on the disposal of the investment from your income, and you receive a tax deduction for the fair market value of the assets donated.
If you are at least age 70 ½, you can make a qualified charitable contribution. Amounts up to $100,000 can be donated from your IRA directly to a charity. You will not receive a charitable deduction for the amount donated, however, the donation will be excluded from your income and can still be used to satisfy your RMD.
Bunching itemized deductions
To itemize deductions, the amount needs to be greater than the standard deduction ($13,850 for single filers and $27,700 for joint filers). Bunching deductions in one year may help you exceed the standard deduction amount and benefit from itemizing. For example, you could make a larger charitable donation in the current year to exceed the standard deduction amount and then make a smaller donation the next year.
The annual gift tax exclusion is $17,000 in 2023. You can give away this amount to an unlimited amount of people without having to file a gift tax return or having the gift reduce your lifetime exemption. While this will not reduce your taxable income, it does result in transfer of wealth to your heirs tax-free.
Our experienced team at Buckingham Advisors is here to help you! If you have questions about your specific tax situation, please contact your Buckingham Advisors representative.