Year-End 2023 Planning Opportunity Checklist

Year-End 2023 Planning Opportunity Checklist

Now is a good time to review year-end tax strategies and plan for the year ahead.  Below are some items that should be completed or reviewed before year end:

Year-End 2023 Investment Strategies

• Harvest Losses – If you have investments with unrealized losses in your portfolio, selling them at a loss could benefit you tax-wise. You can use capital losses to offset capital gains. If your losses exceed your gains, you can use up to $3,000 in losses to offset ordinary income (in other words, the IRS will not tax up to $3,000 of your other earnings). Furthermore, capital losses can be carried forward to future years. This means that if you have a remaining loss once you have offset your gains and $3,000 of income, you can use the remainder to lower your taxes in years beyond 2023.
• Avoid Large Capital Gains – Review mutual fund holdings and look to avoid significant year-end capital gains distributions by selling these funds prior to the dividend record date. Additionally, you should avoid purchasing some mutual funds toward the end of the year in taxable accounts, instead using ETFs to avoid capital gains distributions.
• Harvest Tax-Advantaged Capital Gains – If individuals have low taxable income, it may be prudent to harvest capital gains, as federal capital gains tax rates may be as low as 0%.
• Roth IRA Conversions – If you expect to be in a low-income tax bracket this year, now may be a good time to make Roth IRA conversions. High-income taxpayers with little or no pre-tax IRA assets can also make non-deductible IRA contributions and later convert these funds to a Roth IRA (known as a backdoor Roth IRA conversion).

General Gift Planning Opportunities

• Year-end Gifting – If you have not already done so, review your 2023 charitable and family gifting goals to ensure you are accomplishing your goals in a tax-efficient manner. There are several strategies that a WESCAP advisor can recommend depending on your situation. These include direct gifts of appreciated assets, gifts to a donor-advised fund and using RMDs to pay charities and reduce gross income.
• Qualified Charitable Donations (QCD) – Charitably-inclined individuals may choose to accomplish their charitable goals through donations out of their IRA, utilizing a portion, or all, of their Required Minimum Distribution, up to $100,000. A limitation is that a QCD cannot be made to either a donor-advised fund (DAF) or to a private foundation (operating or non-operating).
• Charitable Gifting – If you itemize on your tax return, donating cash or appreciated stocks to a qualified charity will give you a higher tax deduction. Be sure to retain receipts and track your contributions accurately.  Stocks gifted to a charity can be deducted at their fair market value and avoid capital gains taxes.  Discuss a “bunching” strategy for gifting to ensure you are maximizing the tax benefits for your charitable donations. A Donor Advised Fund (DAF) is a perfect vehicle to make a charitable gift if you have not decided which charity is to receive the donation.
• Family & Friend Gifting – You are allowed to gift up to $17,000 per individual annually before using your lifetime gift exemption. If you gift over $17,000 to an individual during a calendar year, you will need to file Form 709 on your tax return.  No taxes are due until your lifetime exemption is used completely. For larger amounts, you may want to structure them as loans, which you can forgive over time.

Required Minimum Distributions (RMDs)

• Required Minimum Distributions (RMDs) – If you are over the age of 73 in 2023 or have an inherited IRA, or inherited Roth IRA, that you received before 2020 you are required to take your Required Minimum Distribution by year end.
• Inherited IRA RMDs (Under the 10-Year Rule) – If the previous IRA owner passed away after December 31, 2019, then beneficiaries may be subject to the 10-Year Rule under the SECURE Act. 
  • Eligible designated beneficiaries include a surviving spouse, an individual not more than 10 years younger than the decedent, a disabled or chronically ill individual, or a minor child.
    • Eligible designated beneficiaries may distribute inherited IRA funds using the lifetime distribution rules or elect to use the 10-year rule.
  • Non-eligible designated beneficiaries include all other designated individuals and are subject to the 10-year rule.
    • Decedent reached their required beginning date – The beneficiary is required to take annual distributions and the inherited IRA must be emptied by the end of year 10.
    • Decedent had not reached their required beginning date – The beneficiary is not required to take annual distributions but the inherited IRA must be emptied by the end of year 10. 
  • Accelerating Distributions under the 10-Year Rule – It may be prudent for non-eligible beneficiaries who fall under the 10-Year Rule to accelerate their inherited IRA distributions.  Accelerating distributions can help to avoid a larger tax bill from a lump distribution at the end of the 10-year period.  Accelerated distribution strategies may include taking larger distributions in low-income years or taking approximately equal distributions over the 10-year period.
  • Inherited Roth IRA RMDs (Under the 10-Year Rule) – No annual RMDs are required under the 10-Year Rule. The inherited Roth IRA must be emptied by the end of year 10.  Inherited Roth IRA accounts can be distributed without tax consequences. Therefore, it is optimal to distribute the account in the final year from a pure growth perspective. 

The IRS is not waiving penalties for incomplete RMDs under the 10-Year Rule in 2023. 

Other Planning Opportunities Before and After Year End

• Retirement Projections – WESCAP Group offers retirement income projections to ensure you remain on track to meet your long-term goals. We recommend this for individuals who are currently concerned about their long-term financial security or are expecting significant life or financial changes.
• Social Security Analysis – If you are approaching 62 and would like to discuss the optimal strategy to begin taking Social Security benefits, WESCAP can assist in making this decision.
• Education Funding – Set up and fund a 529 education savings account for your child or other relation. You can contribute up to $17,000 per donor per child each year, or even super-fund an account with up to $85,000 in funding per recipient in your first year of funding. You must make an election on Form 709 when super-funding a 529 account.
• Tax Cuts and Jobs Act Expiration 2026 –The majority of federal tax provisions in the 2017 Tax Cuts and Jobs Act (TCJA) will revert to the former tax rules in 2026. 
  • Current Tax Rates Increased – The current federal marginal tax rates will increase back to the prior 2017 rates.  Realizing ordinary income in advance of the TCJA sunset in 2026 may be prudent depending on your income outlook. This could include increased Roth conversions, distributions from inherited IRA accounts, or selling positions with large embedded capital gains.
  • Standard Deduction Reduced – The current standard deduction will be cut roughly in half and personal exemptions for income will return.
  • SALT Cap Ends – For tax itemizers, the $10,000 per year State and Local Tax (SALT) deduction ends in 2026.  A larger itemized deduction could offset the need to accelerate income for individuals with hefty annual State and Local Taxes.

Please let us know if you have any questions about these items or if you would like to schedule a time to talk about your specific situation.