In preparation for the end of the year and the upcoming tax season, we summarized portfolio-related year-end income and estate tax planning tips.
Harvest Losses from Your Taxable AccountsGiven this year’s fluctuations in the market, selling securities for a loss (harvesting losses) may help reduce your tax bill now and in the future. Even if you held the securities for less than a year, losses from the sale of securities could shelter short-term and long-term capital gains realized this year from income tax. Keep in mind that capital losses are netted against all capital gains, including those from the sale of a business and real estate. Any unused losses can reduce up to $3,000 of ordinary income, and you can carry forward any remaining unused losses this year to help reduce your future tax bills. Note that you cannot deduct a loss on a security when a virtually identical one is purchased within 30 days of the original sale, as this is considered a wash sale. Also, if you had significant losses in 2022 or any other prior year, you may have tax-loss carryforwards that can be applied to your 2023 taxes. Contact your Beacon Pointe advisor and your tax advisor if you think you may benefit from realizing capital losses prior to year-end.
Harvesting Gains from Your Taxable Accounts In contrast, if you find yourself in a low tax bracket for 2023, you may wish to take advantage of the lower tax rates on capital gain income. It may benefit you to realize gains from a concentrated stock position to diversify your asset allocation further and increase the cost basis in your overall portfolio. This strategy may also benefit pass-through business owners with an expected net operating loss from your business in 2023.
Maximize IRA and Retirement Plan ContributionsBe sure to fund your retirement account(s) to the applicable limit. The IRA funding limit for 2023 is $6,500 ($7,500 if over age 50), and the elective salary deferral limit to 401(k), 403(b), and 457 plans is $22,500 ($30,000 if over age 50). If you are a business owner, consider contributing to a SEP IRA or establishing and contributing to a Solo 401(k) by year-end. Contributions to a SIMPLE IRA are capped at $15,500 per year, with an additional catch-up option of $3,500 if you’re 50 or older. The contribution limit for SEP IRAs and profit-sharing/401(k) plans for business owners is 20% or 25% of compensation (depending on the business entity) up to a maximum of $66,000 for 2023 ($73,500 if over age 50). If you are a high-income taxpayer, deferring income could potentially allow the 20% qualified business income (QBI) deduction on business income. The QBI deduction may apply if the deferment of income brings your income below the top income and capital gains brackets.
Note that the deadline for making contributions for the tax year 2023 is April 15, 2024. If your spouse actively participates in their employer’s retirement plan, be aware that spousal IRA contributions are subject to income limits. Please discuss eligibility with your tax advisor to determine your contribution amounts.
Convert Your Traditional IRA to a Roth IRA There is even more reason to convert your IRA to a Roth IRA in the next two years, with tax rates expected to increase with the Tax Cuts and Jobs Act (TCJA) sunsetting at the end of 2025. If you believe your tax rate might be higher in the future because of greater expected income or higher tax rates, consider converting a portion of your traditional IRA (or other qualified retirement accounts) to a Roth IRA. A Roth IRA is attractive to those expecting higher taxes in the future because, unlike distributions from a traditional IRA, qualified withdrawals from a Roth IRA are income-tax-free.If market volatility has impacted the value of your IRA, you can convert it in-kind to a Roth IRA. You will pay income tax on today’s value and experience the recovery tax-free in your Roth IRA. A conversion might also help reduce your taxes over time because reducing the value of your Traditional IRA will reduce future RMDs, which might result in a lower tax rate in the future. Other factors to consider are that Medicare premiums and Social Security taxation are determined by your income; therefore, higher RMDs could result in higher taxes and Medicare surcharges. Of course, there is no free lunch, as you will have to pay income tax on the amount you convert.
The conversion typically makes sense if one or more of the following apply: (1) you have monies outside of your IRA to pay the income tax on the conversion, (2) you believe you will be in a higher income tax bracket later, (3) you are not planning on using the converted funds for several years to allow for tax-free compounding, or (4) you plan on leaving your IRA or Roth IRA to your heirs. Note that if you decide to convert to a Roth, you can no longer undo it later (as it used to be), so be sure to check with your tax professional before converting.
Take Minimum Distributions from Retirement Plans If you haven’t already, make sure to take your required minimum distributions (RMD) from your IRA(s) or qualified plan(s) before December 31, 2023. The IRS requires that a minimum amount be distributed from retirement accounts annually. Keep in mind that the RMD age was changed with the passing of the SECURE Act 2.0 from age 72 to 73 and is also set to change in 2033 to age 75. It is important to take at least your full RMD amount before year-end; the penalty for not distributing the minimum required amount is 25% of the amount required to be distributed but not withdrawn. RMDs are not required for Roth IRAs. If you have reached age 73 in 2023, you can delay your first RMD until April 2024, but you will have to take two RMDs in 2024. This may make sense if you have higher income for 2023 and project you might have less in 2024. Work with your tax advisor to determine if this would be a good strategy for you.
RMDs may also apply to certain inherited retirement accounts. The primary factors that determine whether an RMD must be taken from an inherited retirement account, as well as the timing and requirements, are as follows: (1) the date the account holder passed away, (2) the beneficiary’s relationship to the deceased account owner, and (3) the type of retirement account inherited. Working with your tax advisor is required to determine the amount of your RMD and the appropriate amount of income tax to withhold from your RMDs. For more information, read our pieces onFAQs About RMDsorSo You’ve Inherited An IRA.
Consider a Qualified Charitable Distribution (QCD)If you are charitably inclined and over age 70½, you can donate up to $100,000 from an IRA directly to a qualified public charity (not a private foundation, donor-advised fund, or supporting organization) to both satisfy your charitable goals and prevent the distribution from being included in your taxable income. Making a direct donation from your IRA might lower your income and allow you to qualify for lower Medicare premiums and other income tax breaks.Note that contributing to an IRA after age 70 ½ reduces the amount transferable to a charity as a QCD. A QCD also counts toward your annual RMD. As a reminder, a QCD would not be taken as a deduction on Schedule A (itemized deductions) as the amount has already reduced your income on your taxable distribution.
Additionally, beginning this year, individuals subject to RMDs can make a one-time gift to a charitable remainder trust or a charitable gift annuity of up to $50,000.
Make Annual Exclusion Gifts to FamilyFor those who want to help family members, consider making annual tax-free gifts to loved ones. The 2023 annual exclusion allows you to make tax-free transfers of $17,000 per recipient in cash or property without reducing your estate and lifetime gift tax exclusion amount. Married couples can give $34,000 to each child, grandchild, or anyone else using the annual exclusion. These tax-free transfers do not require filing a gift tax return (unless you split gifts with your spouse). Gifting shares of stock or other investments can get them interested in learning about investing. If gifting cash, be sure checks are deposited before year-end to count for your 2023 annual exclusion.
Consider creative ways to give to your children and grandchildren, such as funding college or a loved one’s retirement. You could use the annual exclusion gift to fund a tax-advantaged Section 529 college savings plan, or you can consider using the “super annual exclusion gift,” where you can elect to gift five years’ worth of annual exclusion gifts (keep in mind that you will be required to file a gift tax return); this strategy would allow gifts up to $85,000 or $170,000 if married.Qualified higher education expenses include apprenticeship programs, elementary and secondary schools (up to $10,000 annually), and student loan payments (up to $10,000 for the account holder’s lifetime).
If your children or grandchildren are working, your gift of cash mightfund a Roth IRA to kick-start their retirement savings, compounding growth over a long period and creating tax-free income in retirement.In 2023, your employed children/grandchildren can use up to $6,500 of your gift to fund a Roth IRA ($7,500 if 50 or older), reduced by any other contributions to an IRA. To be eligible, your children/grandchildren must have earned income but not more than $153,000 (single taxpayer) in 2023.
Read our piece onFinancially Savvy Gift Ideasfor other financially creative gifting ideas.
Donate Appreciated Securities or Cash to CharityIf you plan to donate to charity this year, consider making your donation with appreciated stock or mutual funds you have held for more than one year.If you itemize your deductions, you can deduct the full fair market value of the securities (limited to 30% of adjusted gross income [AGI] for public charities and 20% for private charities, with the excess carried forward for five years).You will also avoid the capital gains tax you would otherwise pay on the sale of those securities. If you do not think you will itemize every year, it might make sense to bunch several years of charitable donations into one year using a donor-advised fund. Adonor-advised fundallows you to take the income tax deduction this year but direct the fund to make donations to your chosen charities over many years. Please let your advisor know if you would like to gift securities from your accounts, as it takes some time to facilitate the transfer. Be sure to obtain a receipt and a written acknowledgment from the charity describing the donation and anything you received in exchange for it.For more information, read our piece onThoughtful Charitable Giving.
Charitable Remainder Trusts (CRTs)Although CRTs are not new, they have become more desirable with interest rates rising. A CRT provides for distributions to a beneficiary during the term of the trust (fixed term or lifetime), with the remainder payable to charity. A CRT allows you to make a charitable gift while preserving an income stream for yourself or any other non-charitable beneficiary. You receive an immediate charitable income tax deduction for the charity’s remainder interest. Additionally, consider funding the CRT with appreciated assets; when the trustee sells the assets, any capital gains may be deferred or possibly eliminated.
Tracking Cryptocurrency As more investors explore the world of cryptocurrency, it is necessary to understand the taxation of sales, transfers, and purchases. Currently, the online exchanges that offer cryptocurrencies, such as Bitcoin, do not report on transactions like other investment brokerage firms. This puts the responsibility on the taxpayer to track and report all transactions. It is important to track your cost basis of the purchase to help calculate future gains when the cryptocurrency is later sold. Know that exchanging one cryptocurrency for another is taxable as a sale and does not qualify as a tax-deferred exchange. Additionally, utilizing cryptocurrencies to purchase goods should also be reported as a sale. If you are an active trader or miner of cryptocurrencies, consider using software that will help track everything to make tax reporting easier. Currently, cryptocurrency losses are not subject to the wash sale rules, which means you could sell a position to realize a loss, then repurchase it immediately, and still be able to recognize the loss. Be sure to let your tax advisor know if you have any cryptocurrency holdings so they can help you track and report.
Consider Investing in a Qualified Opportunity Zone (QOZ) Investing realized capital gains into a QOZ fund allows the investor to defer tax on capital gains realized within the last six months until December 31, 2026. Additionally, it provides the opportunity for tax-free growth on any appreciation of the QOZ fund investment as long as you hold your interest for at least ten years. The law allows (1) federal tax deferral of capital gain invested in a QOZ until the earlier of when the fund is sold or December 31, 2026, and (2) federal tax avoidance on investment gain on the initial QOZ investment if held for at least ten years. The capital gain deferred or avoided might still be taxable at the state level, and the federal income taxes will be due with the filing of the 2026 tax return. You must reinvest capital gains realized within 180 days after the gain was realized. The investment does not have to occur in the same calendar year to qualify for deferral. Be sure to confirm timing deadlines with your tax advisor.
Pass-Through Entity Tax (PTET)Currently, 36 states (with other states’ proposals pending) have enacted a PTET since the Tax Cuts and Jobs Act limited the deductibility of state and local income taxes after 2017 (which will sunset at the end of 2025).The PTET allows taxpayers of pass-through entities to opt into paying state income tax on net income at the entity level, which reduces income for federal income tax purposes.For most taxpayers, this will reduce federal income taxes, similar to when state income taxes were fully deductible prior to the TCJA. However, there are a few caveats, so opting in does not always make sense. Every state has different tax rates with their own nuances, so a call with your tax advisor isrequiredto determine if this makes sense for you. The election must be made, and state income taxes must be paid before December 31, 2023, to benefit from the deduction this year.
2023 Key Annual Metrics
2023 Key Federal Itemized and Standard Deductions
The standard deduction is $13,850 for single filers and $27,700 for joint filers. If your itemized deductions exceed the standard deduction, you should itemize. Key itemized deductions:
- Up to $10,000 combined for state and local taxes paid (property tax, plus your choice of state income tax or sales tax);[1]
- Mortgage interest for primary and secondary home loans up to $750,000; loans taken on or before 12/14/2017 up to $1,000,000*;
- Unreimbursed qualified medical expenses in excess of 7.5% of adjusted gross income; and Charitable donations.
- While investment advisory fees are no longer tax deductible as part of your itemized deductions, such fees are deductible in calculating the 3.8% net investment income tax on investment income.
[1] Check with your tax advisor whether your state has conformed to the 2017 TCJA. For example, California and New York have not conformed to Federal law for itemized deductions and still allow a deduction on state tax returns for property taxes, miscellaneous itemized deductions, including investment advisory fees, and mortgage interest on new loans up to $1,000,000.
If you could benefit from a conversation with our advisory team, we would be happy to provide a complimentary consultation.
Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal, or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professionals before making any investment decisions. Past performance is not a guarantee of future results.
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