2023 Year End Planning Checklist

By: W. Kirk Taylor, CFP®

The Holiday Season is upon us, and the end of the year is quickly approaching but there’s still time to take action to lower your tax bill and to check off a few key planning tips to ensure that you are doing everything you can to protect your family’s future.

Minimizing Taxes…

Below we highlight a few steps you can take to lower your tax bill while getting one step closer to retirement.

Maximize contributions to your employer’s retirement plan.

• Maximizing pre-tax contributions to your retirement accounts is the smartest way to take money out of Uncle Sam’s “tax pocket” and put it in your retirement pocket, all while lowering your tax bill.
• If your employer offers a 401(k), 403(b), or 457(b) plan, you can contribute up to $20,500 on a pre-tax basis and if you are 50 years of age and older at any point in 2023, you can make an additional “catch-up” contribution of $6,500 for a total $27,000.
• If you are self-employed and have an Individual 401(k) or Simplified Employee Plan (SEP), the contribution limits are higher – up to $61,000 for 2023. In the case of the Individual 401(k), you can make both the employee contributions outlined above and your business can contribute to the plan.

Contribute to an IRA.

• Not eligible to participate in your employer’s plan or worse your employer doesn’t offer a plan? No problem, simply make a tax-deductible (pre-tax) IRA contribution before the end of the tax filing deadline of April 15, 2024.
• Contribution limits are $6,000 per person plus an additional $1,000 catch-up contribution if you are 50 years of age or older at any point in 2023.

Harvest unrealized losses to offset realized gains.

• If you have taken profits and have realized gains in your investment portfolio this year, congratulations! Be sure to evaluate opportunities to harvest unrealized losses, thereby offsetting previously recognized gains. If your realized losses exceed your realized gains, your excess losses can be used to offset ordinary taxable income up to $3,000. Losses beyond $3,000 are carried forward in any future tax year until exhausted. This excess loss is known as a tax-loss carryforward.
• Be sure to check the capital gain estimates for your actively managed mutual funds. Most fund companies have announced their estimated capital gain distributions for 2023 and will distribute those gains in November and December.
• Be careful not to run afoul of the IRS’s Wash Sale Rules, which basically states that you must wait at least 31 days before buying back a security you sold at a loss.

Give to charity.

• Gifting cash or appreciated stock to your favorite causes should be done no later than December 31, 2023. Be sure to allow ample processing time if you are gifting shares of appreciated stock as processing times can be slow at year end and during the holidays.
• If you’re subject to Required Minimum Distributions (RMD) and you also plan to give to a qualified charity, you can use some or all of your RMD to make a Qualified Charitable Donation.
• Required Minimum Distributions (RMDs) from IRAs were waived in 2020, but they were once again required in 2023. If you are charitably inclined, over age 72, and subject to taking an RMD, consider giving directly to your charity of choice from your IRA. Distributions that are made directly from an IRA to a charity are known as Qualified Charitable Distributions or QCDs. These make sense as the distribution is not counted as taxable income [1]. Each IRA owner may contribute up to $100,000 directly to charity from their IRA each year.

Contribute to a 529 College Savings Account.

• In most states, contributions to a 529 plan are deductible on your state income tax return. You may also consider front-loading a 529 plan by utilizing a special 5-year gift tax election whereby you make a lump-sum contribution in one year of up to 5 times the annual gift tax exclusion ($75,000 in 2023). Your contribution will be treated as if you’d made a $15,000 gift for each year over a five-year period.

Manage Your Estimated Tax Payments.

• If you are retired and not earning a paycheck, your CPA will likely recommend that you make quarterly estimated tax payments, so that you don’t underpay your taxes during the year. Be sure to make those payments on time. They are due on the 15th of each of the following months: April, June, September, and January (of the following tax year).

Accelerate or Defer Income.

• Accelerating or deferring income can be a smart tax planning strategy. While it is not certain, there is a possibility that ordinary income rates and capital gain taxes may increase in 2024 if the Biden administration is successful in passing their proposed spending bill.
• If you have a taxable event or projected income for the remainder of 2023 and for 2024, it may make sense to realize income or capital gains in 2023. However, it is important to consider your individual circumstances and consult with a tax professional before making any decisions.

General Financial Readiness…

Below we highlight items that should be on your checklist each year.

Review Your Estate Planning Documents.

• While most planners and attorneys recommend reviewing your documents every 3 to 5 years, you should be mindful of how proposed changes in tax and estate laws may impact your plan. Major life events such as death, divorce, or the addition of a new family member, often mean updates to your documents are needed.

Review Your Beneficiary Designation.

• Double-check your beneficiary information to make sure they’re still consistent with your objectives. Major life events such as death, divorce, or the addition of a new family member, often mean updates to your documents are needed. Beneficiary designations are revocable and can be updated or amended as often as needed.

Annual Gifting.

• The annual gift tax exclusion for 2023 is $17,000 per year, per person, up from $16,000 in 2022. You can gift up to $17,000 to as many people as you like without filing a gift tax return or incurring a gift tax. If you’re married, you and your spouse can each gift $17,000 to any one recipient. Note that the cost basis for assets gifted to individuals during your lifetime is retained by the individual receiving the gift. Assets that are inherited, receive a “step-up” in basis at the death of the grantor.

Health Care Benefits.

• Be mindful of open enrollment dates. For Medicare Part D (2023), enrollment opens October 15th and closes December 7th.
• Your employer will typically have open enrollment in the fall. This is a great opportunity to review your healthcare expenses during the year to modify benefits to match your actual needs.
• Be sure to spend down your Flexible Spending Account (FSA) balance before the end of the year as these funds are “use them or lose them”.

Definitions

[1] Taxable Income (line 15 on your 2023 Form 1040) is AGI less Deductions (Standard or Itemized).

Please note that this information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.