We have a divided government and an imminent presidential election. As a result, no significant tax legislation has been passed in 2023, and it is unlikely that we will see any significant tax legislation passed before the 2024 election. We can complete our 2023 year-end tax planning with more certainty, but the tax situation for 2024 and beyond is less clear. Mounting federal budget deficits imply that tax rates are likely to be higher in the future. Also, the tax cuts associated with the 2017 Tax Cuts and Jobs Act (‘TCJA”) are set to expire on January 1, 2026, which means that even if congress does nothing, taxes will be higher in the future, making strategies like Roth conversions and even more critical. As we close out 2023, here are a few year-end tax planning ideas.
1. Convert some of your traditional IRA to a Roth IRA: Since tax rates are likely to be higher in the future, consider converting some of your traditional IRA to a Roth IRA. See our more detailed discussion of Roth conversions here: https://www.cedarstoneadvisors.com/post/roth-conversions
2. Harvest Tax Losses: While the stock market has been generally up this year, stocks have been mixed. If you have positions at a loss consider harvesting those losses to lower your tax bill.
3. Maximize your 401k deduction or contribute to a SEP-IRA: This is one of the first and best ways to reduce taxable income. The maximum 401k contribution for 2023 is $22,500 for those under 50 and $30,000 for those 50 and older. Increasing those contributions for the remainder of the year can significantly reduce your taxes due. If you are self-employed then consider starting a SEP-IRA, which generally allows you to contribute up to the lesser of $66,000 or 25% of your self-employment income (check with your tax advisor).
4. Donate appreciated stock: If you are charitably minded, then one of the best ways to reduce taxes is to give. And one of the best ways to give is to donate appreciated stock. If you don’t where to give you can contribute to a Donor Advised Fund, get the tax deduction this year, and then select the final charities in the years to come. See our more detailed discussion of Donor Advised Funds Here: https://www.cedarstoneadvisors.com/post/donating-appreciated-stock
5. Fulfill your RMD’s using Qualified Charitable Donations: If you have not yet fulfilled your required minimum distributions, and you do not need the money, consider donating up to the RMD amount to a qualified charity. The donation will fulfill your RMD, and you can exclude the distribution from your taxable income.
If you would like to discuss these strategies or have questions about your specific situation, please contact us.