2023 Year End Tax Planning Update- Tips, Tricks & Techniques

Dear Valued Client, 

 

 As we approach the end of 2023, now is the ideal time to explore tax planning moves that can potentially lower your tax bill for this year and position you favorably for next year. As your trusted accounting advisors, we aim to proactively uncover savings opportunities tailored to your financial situation. 

 

This letter outlines key year-end planning strategies to discuss with your Kenneth J Watter CPA professional. 

 

 Max Out Tax-Advantaged Retirement Contributions 

 

 Contributing the annual maximum to employer-sponsored retirement plans can lead to substantial tax savings. For 2023, you can contribute up to $22,500 to a 401(k) if you are under age 50 or $30,000 if age 50 or older. Traditional and Roth IRAs also offer tax-advantaged savings up to $6,500, plus $1,000 more if age 50 or older. We are happy to assess if you can still boost 2023 contributions. Acting by December 31 locks in tax deductions or tax-free growth potential. 

 

 Accelerate/Defer Income and Deductions 

 

 Based on our experience, you may want to explore shifting the timing of income and deductions between 2023 and 2024 if you expect significant changes to your tax rate. For example, self-employed individuals might postpone billings to push income into 2024. Deferring a year-end bonus until January 2024 could also make sense. Prepaying 2024 expenses like making an extra mortgage payment before December 31, 2023, can decrease 2023 tax liability. If you have flexibility in when income is received or expenses are paid, let us know so we can run the numbers to assess your best options. 

 

 

 Now can be an opportune time to review your investment portfolio holdings with an eye toward tax efficiency. Tactics like tax loss harvesting, strategic asset placement, and favoring tax-free municipal bonds could help lower investment-related taxes. Additionally, pay close attention to mutual fund distributions as high year-end capital gains dividends could trigger unwelcome tax payments. Feel free to share any late December investment statements so we can look for potential savings moves before January 1st.

 

 

 For those who hold stock options, restricted stock units (RSUs) or participate in employee stock purchase plans (ESPPs), year-end planning takes on increased importance. The timing of exercising options or vesting of RSUs and ESPPs can result in significantly different tax outcomes. With the stock market volatility this year, take time to review acquisition dates and cost basis for your equity holdings. Getting ahead of surprise year-end tax bills with sound exercise or sale strategies could generate substantial savings. 

 

 

 If you participated in flexible spending accounts (FSAs), health savings accounts (HSAs), or dependent care FSAs (DCAPs) in 2023, confirm you’ve utilized all balances by December 31st when leftover amounts may be forfeited. FSAs in particular require special attention to avoid losing unspent funds at year end. Take stock of eligible expenses like eyeglasses, prescription drugs, dental work, or preventative health exams that could draw down your 2023 balance and save on out-of-pocket costs. 

 

 

 For high-net-worth individuals, developing a gifting strategy can significantly reduce future transfer tax liability. Annual federal gift tax exclusions for 2023 are $17,000 per individual recipient ($34,000 jointly for spouses). Reviewing your estate plan and making tax-free gifts to trusts, grandchildren, schools, or charities could grow tax savings exponentially thanks to tax-free investment growth advantages. 

 

 

 Submitting a new Form W-4 to employers is an easy strategy to bump up income tax withholding and counterbalance any year-end planning moves that reduce 2023 liability more than anticipated. Increased withholding can help avoid underpayment penalties or large looming tax bills when you file in early 2024. We recommend checking withholding levels every year and making adjustments to cover at least 100% of 2021’s total tax. 

 

 

For clients who are philanthropically inclined, making multiple years worth of charitable donations before December 31, 2023 can optimize tax deductions. By “bunching” 2-3 years of gifts into one large tax-deductible donation, you can take advantage of more beneficial standard deduction thresholds and carryforward rules. As you budget potential donations, please inquire with us about the tax implications of such “bunching” strategies.  

 

 

If you sold investments in 2023 at substantial capital gains, contributing gains proceeds into Qualified Opportunity Funds (QOFs) by year-end could yield major tax incentives like tax deferral and partial forgiveness on fund appreciation. Over 180 designated QOFs invest in underserved areas spanning all 50 states. But beware - QOF deals can be complicated and require thorough appraisal of risks. Let us know if you need guidance assessing suitability for your financial situation. 

 

 Review SALT Deduction Limit Planning 

 

 Despite federal caps on state and local tax (SALT) deductions, certain states provide mechanisms to fund state-administered charitable funds or pay pass-through entity taxes as potential workarounds to the $10,000 SALT deduction limits. Given recent legal uncertainty, check with your CPA regarding eligibility for any 2023 SALT deduction planning in applicable states like Maryland, DC, or Virginia.

 

 

Under current federal law, estates worth over $12.92 million per person ($25.84 million per couple) owe steep 40% estate tax rates for amounts over the threshold. Now is the optimal window for high-net-worth individuals to minimize estate tax liability via gifting assets to irrevocable trusts or heirs. Estate planning vehicles like Grantor Retained Annuity Trusts (GRATs), Intentionally Defective Grantor Trusts (IDGTs), and loans to family members at minimum allowable interest rates could reduce future exposure as well. 

 

 Inform Us of Life Changes 

 

 If you experienced major life events in 2023 like a new child, marriage or divorce, home purchase, job change, retirement, business launch, or loss of a loved one, please share details with us as soon as possible. Certain life changes can have major tax ramifications from adjusted gross income to changing tax brackets. We want to ensure proper dependencies, income sources, available deductions, and credits based on new developments over the past year.

 

 

For taxpayers holding cryptocurrency like Bitcoin and Ethereum, properly accounting for digital asset transactions on 2023 taxes continues posing challenges but also savings opportunities. Keeping meticulous records of cost basis, exact dates, and fair market values for all trades is essential this tax season. Based on fluctuating values this past year, some may qualify for tax loss harvesting or even charitable tax deductions from certain cryptocurrency donations before December 31st. 

 

 

 Under the new Inflation Reduction Act signed into law on August 16, 2022, federal tax credits up to 30% now apply for installations of solar panels, heat pumps, wind turbines, electric cars, and energy efficiency upgrade expenses incurred through the end of 2032. Additional credits up to $14,000 are also now available for new electric vehicle purchases depending on final assembly location and battery components. We recommend reviewing eligibility for these new “green” tax credits associated with sustainable products and advancements that can trim future tax bills. 

 

 Meet With Us for Personalized Strategies 

 

 This overview highlights the main 2023 year-end tax planning topics top of mind. Please set up time to meet with me or your accountant at Kenneth J Watter CPA so we can offer tailored strategies addressing your unique financial situation.

 

Our team looks forwarding to connecting with each client to uncover every allowable deduction, analysis of income accelerating and deferring options, discuss specific tax credit eligibility, and project detailed outcomes of year-end moves available before the December 31 midnight deadline. We sincerely appreciate the continued opportunity to serve as your trusted accounting advisors and look forward to connecting this month. 

 

Feel free to call the office at 301- 652-0580 with any questions on these or other planning topics. Here’s to a prosperous tax season ahead in 2024 and many happy returns!

 

 Sincerely, Alice Welch, CPA 

 

Partner in Charge 

 Kenneth J Watter CPA, P.A.