As the closing weeks of the year quickly approaches, there are many steps that individuals and families can take to reduce taxes. These steps can not only yield immediate savings but also set up additional opportunities in 2024 and beyond. While tax planning is most effective when conducted on an ongoing basis, there are steps to take now that can have an immediate impact. This includes optimizing gifting strategies, maximizing retirement plan contributions, prepaying university expenses, IRA conversions and tax loss harvesting. To reap the full benefit, it is essential to take action before December 31st. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
Year-End Tax Planning Steps
- Maximize Retirement Plan Contributions – For those who are still working consider maximizing contributions to a tax-deferred retirement plan such as 401(k), 403(b), or Individual Retirement Accounts (IRAs). For 2023 the contribution limits are $22,500 for 401(k)/403(b), $15,500 for SIMPLE Plans, and $6,500 for IRAs. For those aged 50 and older, an additional $7,500 is available through catch-up contributions.
- Roth IRA Conversion – This allows taxpayers to set up future tax savings by converting a tax-deferred IRA to a Roth IRA. While the contributions made to a Roth IRA are not immediately deductible the eventual distributions are not included in income tax. At the same time, Roth IRAs are not subjected to Required Minimum Distributions (RMDs). This allows a taxpayer to keep the funds in the plan until needed. Since funds converted in the process count as income in the year of conversion it is important to remain in the current bracket to avoid a large tax bill.
- Qualified Charitable Distributions (QCDs) – For taxpayers 70 ½ and older there is an opportunity to make cash donations of up to $100,000 to eligible charities directly out of an IRA. There is no tax assessed on QCDs, but the taxpayer cannot take advantage of an itemized charitable contribution deduction either. This is an attractive option because it creates an immediate tax deduction without the concerns associated with charitable contribution write-offs.
- Pre-pay Education Expenses – Pre-paying eligible higher education expenses can lead to savings through the American Opportunity Credit or the Lifetime Learning Credit. The former offers a credit equal to 100% of the first $2,000 of postsecondary education expenses plus 25% of the next $2,000. This means a maximum annual credit amount of $2,500 per student. The latter offers a credit equal to % of qualified education expenses with a maximum of $2,000 per family.
- Tax Loss Harvesting – For those taxpayers with a large net capital gain it is essential to generate a loss to help offset gains. Consider selling underperforming securities at a loss before year-end. If this generates slightly more loss than gains, remember individuals can offset up to $3,000 of ordinary income. It is important to remember not to purchase the same or similar security within 30 days to avoid complications from the wash-sale rule.
- Investigate Gifting Opportunities – Consider leveraging the $12.92M federal estate, gift, and generation-skipping transfer tax exemption (GSTT). It was changed as part of the Tax Cuts and Jobs Act of 2017 (TCJA) and is expected to sunset to lower amounts in 2026. This means a tax-free gift of up to $25.84M for married couples is available for 2 more years. Married couples need to use one partner’s full exemption to allow the other to retain their exemption.
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The end of the year is an excellent opportunity to make strategic moves to reduce taxes owed. Since each taxpayer has unique circumstances, it is essential to consult with a qualified advisor for guidance. If you have questions about the information outlined above or need assistance with tax planning or other issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.