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10 Year-End Tax and Financial Planning Tips for 2023

By Cynthia Turoski, on November 13th, 2023

‘Tis the season to get together with family and friends and give thanks. As you sit down to carve the turkey this Thanksgiving, don’t forget to serve yourself a huge portion of year-end tax and financial planning strategies! Consider these tips:

  1. Roth IRA Conversion – If you have pre-tax IRA balances, consider doing a Roth IRA conversion. The pre-tax balance you convert is taxable income in the year of conversion but allows for tax-free growth from that point on. There are no required minimum distributions (RMDs) on Roth IRAs, so converting also reduces or eliminates future RMDs while keeping the balance in a tax-deferred retirement account wrapper. The current lower tax rates and wide tax brackets (meaning more income is taxed in lower brackets) are set to sunset 12/31/25, resulting in higher taxes for most people thereafter. Perhaps your IRA balance has declined in the market, or your income is lower this year. These factors can all make it a good time to see if a Roth IRA conversion is right for your situation. Conversion can also make sense for IRA balances you may never need for your lifetime. It’s a great vehicle to pass on to heirs, who likely will have to deplete the account within 10 years. It continues tax-free to the beneficiary, which helps alleviate the tax implications of the 10-year payout. If you’re in an estate tax situation, paying the income tax on the conversion reduces your estate and allows a valuable tax-free asset to pass to heirs (you essentially are paying the income tax for them without it being considered a gift).
  2. Harvest Losses – Consider harvesting losses in your nonqualified (non-retirement) investment accounts to be used to offset any capital gains realized this year. You can deduct up to $3,000 of excess capital losses beyond that and carryover the balance to offset future year’s capital gains.
  3. Backdoor Roth IRA or Mega Roth – For those who do, or are considering doing, backdoor Roth IRAs, make your 2023 IRA contribution now, hold it in a money market/cash option, convert it a few days later, then invest it inside the Roth IRA before the markets rally. Similarly, if you can make after-tax contributions to your 401(k) plan that also offers a Roth account, maximize the after-tax contribution and convert it to the Roth account as soon as possible (aka Mega Roth). This would allow future earnings on the balance to grow tax-free in the Roth account. Also, by doing this as early in the year as possible each year, you lock in the opportunity in case laws change disallowing conversion of after-tax dollars to Roth like was proposed a couple years ago. Congress doesn’t like that strategy, so they might try again to change the law to disallow them.
  4. FSA, HSA – Spend your flexible spending account balance if it otherwise won’t carry over into next year. This doesn’t apply to a Health Savings Account (HSA) since that balance can accumulate. Most plans even allow the balance to be invested. Unlike your 401(k) plan, qualified distributions are tax-free. For that reason, consider paying for current medical expenses out of cash flow and let your HSA compound tax-deferred for distributions later in life. Save your receipts for unreimbursed expenses you incurred since you’ve had the HSA in case you want a distribution sooner. You can reimburse those anytime.
  5. Donor-Advised Fund – Use a donor-advised fund (DAF) to funnel your charitable donations through to charities. The gift to the DAF counts as a charitable contribution for tax purposes, yet you can control when the charity gets the money – whether it’s now or in the future. This works well for “bunching” your charitable contributions to make your itemized deductions high enough to hurdle over the standard deduction in some years and take the high standard deduction in the off years. Usually, the total deductions over those years are higher by doing this. The high standard deduction is set to expire 12/31/25, so this is a great strategy to maximize it while we have it. Some people accumulate money in their DAF so they can make a larger charitable grant, possibly something in their name. You can open a DAF through your local Community Foundation or at investment institutions such as Fidelity, Vanguard, Schwab, etc. and can give it a name, if you’d like. Additionally, you can name a successor advisor to advise on the charitable grants if something happens to you. Have your children or grandchildren help you select the charities to receive grants. It’s a great way to involve the kids in charitable giving!
  6. Qualified Charitable Distribution – For those age 70.5 or older, consider making your charitable contributions of up to $100,000 directly from your IRA to a charity through a Qualified Charitable Distribution (QCD). The distribution won’t count as taxable income and can satisfy your Required Minimum Distribution (RMD). This applies to inherited IRAs as well if you are at least age 70.5. The QCD can’t be to your DAF or to a private foundation.
  7. Donate Appreciated Stock – Make your charitable gifts with appreciated stock. You get the charitable deduction for the full value as if you sold the stock and gave the proceeds, yet you never have to recognize the capital gain – a double tax savings of charitable deduction and capital gain avoidance. You can even give a larger gift of appreciated stock to your DAF, sell it inside the DAF and use the proceeds to dole out the charitable grants in smaller amounts to various charities. Also consider making additional gifts to your existing charitable remainder unitrust or private foundation to benefit charity later but still get the tax deduction now.
  8. Annual Exclusion Gifts – Make annual exclusion gifts by year-end of up to $17,000 per donee ($34,000 per donee for a married couple who elect gift splitting or pay from a joint account). These add up over time for reducing your taxable estate and you can enjoy seeing them receive your gift during your lifetime. If they have earned income and haven’t already contributed, consider making an IRA or Roth IRA contribution on their behalf as your gift. You can also contribute to their HSA if they have one and haven’t already maxed the contribution. They’ll get the income tax deduction for your contribution, which helps them even more.
  9. 529 Plans – Make your NYS 529 contribution of up to $5,000 per taxpayer by year-end to get the max NYS tax deduction, even if you need to withdraw it soon after for tuition. Be sure to reimburse yourself from your 529 plan by year-end for qualified education expenses incurred during the year. Distributions must be matched to the year expenses were incurred by you or your child to be a qualified withdrawal (tax-free). You can contribute $85,000 to the 529 plan in 2023 if you treat the contribution as if it were spread over a 5-year period at $17,000 per year and make no other gifts to that beneficiary during that period. The 5-year spread has to be elected on a gift tax return. The lump sum contribution jump starts the tax-deferred/tax-free growth opportunities. If you die during that period, the “unamortized” portion would be includible in your estate.
  10. Establish a Solo 401(k) – Consider if a solo 401(k) plan is suitable for your small business or side gig and establish it by year-end to maximize contribution opportunities. To qualify for this type of plan, your business can’t have other eligible employees besides you and your spouse. If your business is incorporated, it’s too late to make a 2023 deferral election from your salary. However, you can at least get a 2023 tax deduction for a profit-sharing contribution you make by the due date of the business’s 2023 tax return. If your business is unincorporated (i.e., sole proprietor, LLC, partnership), you can even make an “employee” deferral contribution in addition to an “employer” profit sharing contribution by the due date of your business’s tax return and deduct the total contribution on your 2023 tax return. The plan just needs to have been established by 12/31 of the current year to be eligible for both the “employee” deferral contribution and the employer profit sharing contribution. The SECURE Act now allows you to establish the plan after year-end, but you would only be eligible for the “employer” profit sharing contribution piece.

Hopefully these tips give you an idea of how to make the most of your finances. Be sure to take advantage of these opportunities before year-end!

If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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