"The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether to avoid them, by means which the law permits, cannot be doubted"
- George Sutherland
Year End Tax Tips
Before you put a bow in this year’s finances here’s a list of things you can do between now and the end of the year to either reduce taxes or put yourself in a better position financially going into 2023:
Bunch Deductions: Here’s how bunching itemized tax deductions works. You group as many tax-deductible expenses as possible into a single tax year. In the year that you have bunched your itemized deductions, you itemize on your taxes. The following year, you take the standard deduction ($27,700 for 2023). “Bunching” means you need to carefully plan the timing of your deductions by making them in one year instead of two. In doing so, you’ll receive a greater tax benefit for the same dollar amount of deductions over multiple years.
Use a DAF (Donor Advised Fund) to help you Bunch Deductions. Consider bunching charitable deductions with a donor-advised fund, so you increase your charitable deduction if your itemized deductions exceed your standard deduction. This will allow you to deduct the charitable contribution in the year it was made to the DAF and defer the donation decision to a specific organization to a later period.
Take RMD’s (Required Minimum Distributions) from your IRA. That’s the IRS-mandated amount of money that you must withdraw from traditional IRAs or an employer-sponsored retirement account each year. You need to start taking it at age 72. The penalty for missing an RMD is huge - so don't forget!
If you need to take RMD’s and you regularly give to charity – consider a Qualified Charitable Distribution. Qualified Charitable Distributions are contributions to charity made directly from your IRA. These contributions are NOT considered income to the taxpayer. Given higher standard deductions, these can be a huge tax benefit – but there’s some tricky rules so please contact a tax or financial professional to make sure you do this right.
Tax Loss Harvesting: If you have any losses in either individual stocks or mutual funds consider taking the losses to offset realized gains or to take advantage of the $3,000 net capital loss that you can take against your adjusted gross income.
Gifting of highly appreciated securities: rather than gifting cash to charities consider gifting highly appreciated stocks, mutual funds or ETF’s. The advantage to gifting appreciated securities is you avoid paying capital gains on selling the securities while still getting the tax break for the donation. Make sure the securities have been held at least 1 year. You can also use the cash you would have donated to buy the security you gift and thus be in the same position without the unrealized gain.
Catch Up Contributions: Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions in IRA’s and 401k’s. An extra $1,000 in IRA contributions or $6,500 in 401k contributions!
Estate tax planning: The official estate and gift tax exemption is $12.06 million per individual for 2022 deaths, up from $11.7 million in 2021, according to new IRS inflation-adjusted numbers. That $12.06 million estate tax exemption is set to be cut in half at the start of 2026 due to the expiring provisions in the 2017 Tax Cut and Jobs Act. The consensus is that the current exemption is probably as big as it gets and the best strategy might be to use it up, regardless of proposed legislation. Get with an estate planning attorney ASAP to discuss your options if you have a high net worth.