October 6, 2023

YEAR-END TAX PLANNING 2023

by Austen Hawkey, CPA, CFP®

With the fall air arriving, school buses impacting morning commutes, and football games back in action, the last thing at top of mind for most people are taxes. After all, Tax Day isn’t for several more months and we still have the holidays and year-end to get through. However, now is the time to review your current tax situation for the 2023 tax year so planning strategies can be implemented prior to year-end. At Armor, we have been reviewing our client’s prior year tax returns and facilitating discussion with their CPAs to ensure we are all on the same page regarding their individualized plan to optimize the current year as well as their lifetime tax bill. Through this process we have noticed some recurring themes that I will highlight.

CAPITAL GAINS

Capital Gains within a taxable investment account (not a tax-deferred account like an IRA, 401(k), or Roth) are potentially taxed at preferential tax rates when compared to ordinary income if the underlying asset is owned for 12 months or longer. Also, there is a netting process between capital gains and capital losses. If there are net losses, up to $3,000 of capital losses can be used to reduce ordinary income and the balance carried forward to subsequent tax years. Two strategies we consider within our client’s portfolios are tax-loss and/or gain harvesting and maximizing tax brackets. Tax loss/gain harvesting can allow a client’s portfolio to rebalance over time by using positions at a loss to offset gains in position(s) that have appreciated. Maximizing a client’s tax bracket can provide for realizing gains in a lower tax bracket (15% for example) in a year where they have room to realize more income before moving up to a higher bracket.

CHARITABLE GIVING

Charitable Giving strategies that were commonly used are gifting of appreciated stock and qualified charitable distributions (QCD). When appreciated stock is gifted to a qualifying charity, the potential charitable deduction for the individual is the fair market value of the stock at the time of the gift. If the same stock was sold, the individual would owe capital gains taxes on the gain amount which could reduce the amount of gift to the charity. It is important to know if you itemize deductions or use the standard deduction. For a taxpayer who uses the standard deduction, a gift of appreciated stock would lose its benefit of a deduction. A QCD is when an individual that is age 70 ½ or older makes a gift (up to $100,000 per year) directly from their IRA to a qualifying charity. It is important to note that donor advised funds do not qualify. Because this distribution goes directly from the IRA to the charity, the distributions are not included in the taxpayer’s ordinary income like other IRA distributions. Once the taxpayer is in Required Minimum Distribution (RMD) status, they can use QCD’s to satisfy all or a portion of their RMD if the distribution goes directly to the qualifying charity, they report it as a QCD on their return, and they do not exceed the $100,000 limit. This is helpful for most taxpayers but especially for those who do not itemize their deductions as they would still benefit from the charitable gift by reducing their taxable income.

RETIREMENT PLANS

Retirement Plan Contributions prior to year-end for individuals who can still make contributions or benefit from Roth IRA conversions is another consideration that can have significant impact over the taxpayer’s lifetime. It is important to keep in mind the long-term implications of compounding and tax savings while reviewing what strategy to utilize. We work with clients and their CPAs on an annual basis to revisit the strategic long-term plan while adapting for the tactical annual adjustments.

DEDUCTIONS

Deductions can have a major influence on which tax planning strategies to implement. As described earlier, the individual taxpayer’s circumstances will determine if it will be more beneficial to utilize the QCD strategy rather than gifting appreciated stock. Also, bunching deductions into one year to utilize itemized deductions and then offsetting the subsequent year(s) with the standard deduction is another strategy.

The above strategies are not for everyone and are not intended to serve as tax advice. These strategies require careful consideration through conversations and analysis with your financial advisor and CPA prior to implementation as everyone’s circumstances are unique. We would recommend reaching out to us for further discussion as to which strategy could be beneficial for you.

—A. Hawkey