By Robert Bartley, CFP™, CPA (and Joanne Tackes)
The end of the year is fast approaching. A little preparation for tax season now could help reduce your 2023 tax bill, no matter whether you live in Massachusetts, New Hampshire or elsewhere. Read on for some strategies you can implement before we ring in the new year.
Timing of Income and Deductions
When considering the timing of income and deductions, think about two years minimum. It is generally sound planning to defer income until next year and accelerate deductions into this year. However, if you anticipate your income will be substantially higher next year, the opposite would be true.
If you are a W-2 employee, you may have the ability to defer a year-end bonus or commission to next year. If you are self-employed, consider invoicing late in December to defer receipts until next year.
The decision to hold or sell a security is based on many factors including the long-term quality of the security and how it fits into your overall investment strategy. Once the decision has been made to sell a security, consider the tax impact of selling now vs. at some point in the future.
Net short-term gains are taxed as high as 37% Federal and 12% Massachusetts while net long-term gains are taxed at 0% to 23.8% Federal and 5% Massachusetts. A net loss for the year can be used to offset up to $3,000 of regular income on your Federal tax return. Any net losses above $3,000 will carry forward to future years.
There are also rules to prevent you from claiming a loss on the sale of a security if you purchase the same security within 30 days before or after the sale – even if the purchase is in a different account.
Mutual Fund Distributions:
If you decide to sell a mutual fund, you will want to do so before the record date for year-end distributions. Most mutual funds distribute ordinary and capital gain dividends to shareholders between October and December (mostly in December). These distributions are essentially an accounting entry for income and net capital gains. These distributions do not increase the value of the investment – only the tax bill to the shareholders!
For the same reason, if you plan to invest in a mutual fund that has an impending distribution, don’t buy until after the dividend record date or you will be buying a tax liability with no economic benefit.
If you are a cash-basis taxpayer, you can deduct any purchases charged to your bank credit card (not a store charge card) by year-end. If you anticipate any major purchases (equipment, furniture, etc.), there are several provisions that will allow you to deduct up to 100% of the cost in the year purchased rather than depreciating the cost over several years.
If you itemize deductions (only if deductions are greater than the Standard Deduction of; Single $13,850, Married Filing Joint $27,700 and Head of Household $20,800), get your payments in by December 31st but keep in mind that you may not always get an incremental benefit by accelerating an expense.
- Qualified medical expenses are deductible to the extent the total exceeds 7.5% of your adjusted gross income (AGI). If that one additional medical expense is not going to be enough to push you over the 7.5% of AGI threshold, there is no benefit to accelerating it into 2023.
- Only the first $10,000 of “SALT”, State And Local Taxes (income or sales tax plus property taxes) is deductible. If your state and local taxes already total $10k, you won’t get any tax benefit from moving additional taxes into this year. If you DO have room under the $10,000 ceiling, it makes sense to accelerate the payment of your state income tax, your already assessed property taxes, or your excise taxes to get you up to the $10,000 maximum.
- Mortgage interest is deductible on up to $750k of acquisition indebtedness ($1M if purchased prior to 12/16/17) so it pays to make that January 2024 mortgage payment early.
- Charitable contributions are deductible in the year they are paid subject to certain limits based on your Adjusted Gross Income. Consider donating appreciated stock held long- term (>1 year) to a charity. You get a deduction for the current fair market value and avoid paying taxes on the appreciation. Make sure your contributions are either completed online or postmarked by December 31st.
If you find yourself unable to itemize every year, consider a strategy of bunching your expenses together every other year or every few years in order to claim itemized deductions periodically. See our blog post Group Your Itemized Deductions for Real Tax Savings for more details. In addition you can use Donor Advised Funds (DAFs) to help bunch deductions.
Your traditional or Roth IRA contribution for 2023 must be made by April 15, 2024. The maximum contribution allowed is $6,500 for those under age 50 and $7,500 for those age 50 or older by 12/31/23. Whether to contribute to a traditional or Roth IRA depends on your tax situation. If you are unsure, please ask Bartley Financial or your tax preparer.
Employer Retirement Plans:
Check your most recent pay stub to make sure you will maximize your workplace retirement deferrals for the current year. The contribution limit for a 401k/403b/457b rose this year to $22,500. This limit increases to $30,000 if you are age 50 or older.
Maximum SIMPLE plan deferrals are $15,500 for those under age 50 and $19,000 for those age 50 and older.
If your contributions will fall short and you have the cash flow to do so, increase your deferral for the remaining pay periods in order to maximize your contributions for the year.
If you have an inherited IRA (traditional or Roth), remember to take your Required Minimum Distributions (RMDs) prior to year-end or face a penalty of 25% of the amount that was required to be distributed.
Similarly, if you are age 73 prior to the end of the year, remember to take any RMDs from your IRA accounts by December 31st or face the 25% penalty. No distributions are required from Roth IRAs. There is an exception that allows those who first turned 73 this year to defer their 2023 RMDs to no later than April 1, 2024.
If you are age 73 or older, consider making a gift to a qualified charity from your IRA account. The distribution is not taxable and can be used to satisfy your RMD for the year. See our blog post Tax Savings on Qualified Charitable Distributions from IRAs for more details on using this strategy.
The annual gift tax exclusion is $17,000 per individual recipient. If you and your spouse make a joint gift, the limit is $34,000 per recipient. Note that the recipient must receive the gift AND deposit it by December 31 for it to be considered a completed gift this year.
Consider gifting appreciated stock. You avoid paying the capital gains tax on the appreciation. Assuming the gift recipient has less income than you, he/she may be able to pay low or no capital gains tax when they sell the stock.
If you are a Massachusetts resident, you can deduct up to $1,000 ($2,000 if married filing joint) in contributions to a college savings plan established by the Commonwealth.
Contributions to a 529 plan are treated as completed gifts to the named beneficiary. Special rules allow you to make up to five years’ worth of gifts to a 529 account in one year. Your 2023 gift of up to $85,000 ($170,000 if you and your spouse make a joint gift) is treated as being made ratably over the current year and the next four years. The gift tax exclusion increases to $18,000 in 2024.
To maximize frontloading, consider making a $17,000 ($34,000 joint gift) by the end of the year. then make a 5-year $90,000 ($180,000 joint gift) contribution in January 2024 using the new $18,000 gift tax exclusion amount. Since the overall cap of $18,000 per recipient applies each year, no additional annual exclusion gifts could be made to the same beneficiary over the 5-year period – unless the annual exclusion amount is indexed in later years for inflation.
Health Savings Accounts (HSAs):
If you have a high deductible health plan and contribute to an HSA (either through payroll deferral or an account you have established as a self-employed individual), review your contributions year-to-date to determine whether you will maximize for the current year.
If your contributions will fall short and you have the cash flow to do so, increase your payroll deferral by year end to maximize your contributions for the year. If you make deposits outside of your payroll directly to your HSA account, you have until April 15,2024 to maximize your contributions.
- The 2023 contribution limits are $3,850 for individual coverage and $7,750 for family coverage.
- For 2024 these limits increase to $4,150 for individual coverage and $8,300 for family coverage.
- Once you reach age 55, you can contribute an additional $1,000 annually.
If you have a balance remaining in your Flexible Spending Account (FSA), check your plan rules so you don’t lose any funds. Some FSA plans allow you to carry over a maximum of $610 in unspent funds to the following year. Other plans offer a grace period of up to two and a half months after the plan year to incur and pay for eligible expenses. Some other plans have a use-it-or-lose-it provision requiring you to clean out your account by December 31. The rules are company specific.
It is not too early to set up a folder for tax documents. You can get a jump on organizing receipts needed for deductions. When tax documents start arriving in the mail in January, add them to your folder as soon as they arrive. No more misplaced tax documents!
Bartley Financial is built around a client-first ethos. We are as committed to exhibiting high levels of professionalism as we are to building relationships with clients built on trust and mutual respect. That’s why we hold ourselves to a fiduciary standard. It’s also why we offer a transparent, fee-only compensation structure so that our clients never need to be concerned about a conflict of interest.
Bartley Financial has an experienced team of CPAs and CFPs® (Certified Financial Planners®) dedicated to helping clients manage their investment portfolios, plan for retirement, strategize taxes, or execute any other initiatives in pursuit of optimum financial health and minimal financial stress. From our offices in Andover, MA, and Bedford, NH, we work to ease clients’ financial concerns, strengthen their portfolios, and assuage their worry that they don’t know what they don’t know. Contact us today to begin a relationship with a team of knowledgeable, trustworthy professionals who put their clients first.