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Yearend Tax Tips for 2023
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As yearend approaches, we offer some tax tips for your consideration. These are of a general nature and would require additional advice from our office or your tax professional.  We love helping clients reduce their taxes.  So, let's talk about lowering taxes, and if so, before December 15.

First, you might want to develop a baseline to determine your tax bracket.  Ask your tax professional to draft an estimate of your 2023 tax return.  If there has been no substantial change in your situation, your most recent tax return should work. This data will suggest how or when you might take advantage of an available tax deduction. 

Charitable Deductions: Many people make end-of-year contributions to charitable organizations to claim a tax deduction for the current tax year. As long as you itemize your deductions and donate to a qualified charitable organization, you can typically deduct these contributions on your tax return.  There are limits to how much you can deduct in a single year, and it depends if the contribution is cash or in-kind. 

Donor Advised Fund (DAF): Due to changes in tax laws that increase the standard deduction, some taxpayers might find it beneficial to "bunch" charitable donations. Instead of giving annually, you might give a larger amount every other year or every few years to exceed the standard deduction and then itemize that year.  One vehicle for bunching contributions is the Donor Advised Fund (DAF). It provides an immediate deduction for contributions you may make now and in the future. With a DAF, you can choose the specific charities later.

Qualified Charitable Distribution (QCD): If you're 70½ or older, you can directly transfer up to $100,000 per year from your IRA to a qualified charity without the amount being added to your taxable income. This is a QCD and can also satisfy your required minimum distribution (RMD) for the year.  This is particularly tax-efficient for those who do not itemize deductions.  

Appreciated Stock: Consider donating appreciated stock or mutual fund shares instead of cash. This can be a tax-efficient way of giving as you may avoid paying capital gains tax on the appreciated amount, and you can often still deduct the total market value.

Gift Tax Exemption: The annual gift tax exclusion amount is $17,000 per recipient. This means you can gift up to that amount to any number of individuals without incurring a gift tax or even having to report the gift.  The limit is $34,000 for a couple jointly making a gift. 

529 Plans: If you're saving for education, consider making contributions to a 529 plan. While there's no federal tax deduction for these contributions in certain states, earnings grow tax-free, and distributions for qualified education expenses are also tax-free. 

Tax-Loss Harvesting:  Assets that have dipped in value might be sold to create a loss in the current tax year.  The proceeds could be reinvested in a similar investment to maintain one's overall asset allocation strategy.  In a languishing market, tax-loss harvesting is a proven tax-reduction strategy with no downside risk. 

Exercising Stock Options: Corporate executives and tech employees often receive compensation in the form of stock options. Our office can help provide the “breakeven analysis” as you consider exercising stock options in 2023. Consider options that are “deep-in-the-money” or will soon expire.  This can be coordinated with other tax strategies, such as tax loss harvesting.

Check Contribution Deadlines: While some contributions can be made until the tax filing deadline (like an IRA), others, such as charitable donations or 401(k) contributions, typically must be completed by December 31st to count for that tax year.

Retirement Accounts: Contributing to retirement accounts like a 401(k) or IRA by year-end can provide tax benefits. For instance, contributions to a traditional IRA may be tax-deductible, while contributions to a Roth IRA are made with after-tax dollars that will then grow tax-free.

Traditional IRA:
Contribution Limits: $6,500 annually ($7,500 if age 50 or older with a $1,000 “catch-up” contribution).
Tax Treatment: Contributions are generally tax-deductible (subject to income limits if you or your spouse are covered by a retirement plan at work). Distributions are taxed as ordinary income.
Age Limitations: No contributions are allowed once you reach age 72, the same age at which 
Required Minimum Distributions (RMDs) start.

Roth IRA:
Contribution Limits: $6,500 annually ($7,500 if age 50 or older with a $1,000 catch-up contribution).
Tax Treatment: Contributions are made with after-tax dollars, meaning they're not tax-deductible. Distributions, including earnings, are tax-free after age 59½ and if the account is at least five years old.
Income Limits: There are income phase-out ranges for eligibility to contribute.
Age Limitations: No age limit for contributions and no RMDs.

401(k), 403(b), and most 457 plans:
Contribution Limits: $22,500 annually ($30,000 if age 50 or older with a $7,500 catch-up contribution).
Tax Treatment: Traditional 401(k) contributions are pre-tax, reducing taxable income for the year. Distributions are taxed as ordinary income. Roth 401(k) options are available in some plans, offering tax-free distributions.
Employer Match: Many employers offer a matching contribution. Always understand the vesting schedule and match formula.  RMDs: Start at age 72.

SEP IRA:
Contribution Limits: Less than 25% of compensation or $66,000 for 2023.
Tax Treatment: Contributions are pre-tax. Distributions are taxed as ordinary income.
Eligibility: Designed for self-employed individuals and small business owners.

Use It or Lose It: Certain accounts, like a Flexible Spending Account (FSA), operate on a "use it or lose it" principle. This means any contributions you've made to these accounts that you haven't spent by the end of the year (or grace period, if applicable) are forfeited.

Get Receipts: Ensure you receive proper documentation or receipts for your contributions, especially if you plan to claim them as deductions on your tax return.

The above tax tips are not necessarily appropriate for your particular situation.  So, as always, we welcome your calls and look forward to being of assistance. Due to various practicalities, we would need to act by December 15. 

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