Tax Moves to Consider Before Year-End

As we head into the final quarter of 2023, proactive investors should use this time to make strategic tax planning adjustments. As the end of the year approaches, here are a few tax moves to consider:

Manage Your Tax Bracket

Those straddling the next tax bracket should pay special attention to anything that might bump their income up and plan on reducing taxable income before year-end.  If it looks like 2023 is shaping out to be a great income year, it may make sense to defer income or accelerate deductions to minimize your tax liability. For example, bunching up your medical expenditures or charitable contributions, or maximizing your pre-tax retirement plan contributions may allow you to make the most of your itemized deductions than if you took the standard deduction.

Analyze capital gains and net investment income by reviewing your portfolio for investments that have unrealized losses. It might be a good time to harvest capital losses to offset any capital gains generated during the year and up to $3,000 of ordinary income.

Take Your Required Minimum Distributions

Investors who are age 73 or over must take required minimum distributions (RMD) from their qualified plans and IRAs or face a 25% tax penalty on amounts not withdrawn from their IRA to meet the RMD. For clients who are age 70.5 or older and are charitably inclined, up to $100,000 can be distributed from their IRA to a charity and that will satisfy their RMD. This qualified charitable distribution must be made directly from the IRA to the charity to avoid inclusion in income.

Invest in Energy-Efficient Property

The Inflation Reduction Act provides a number of enhanced energy tax credits for 2023. The energy-efficient home improvement credit provides a credit of 30% of the costs of all eligible home improvements such as air conditioners, water heaters, heat pumps, roofs, insulation, windows, doors, etc., made during the year, up to a $1,200 annual limit.  Also, the residential clean energy property credit allows a 30% credit for expenditures on certain solar, wind, geothermal, and battery storage properties.

Ramp Up Gifting

Another area to think about is minimizing your estate and gift tax. While the estate and gift tax unified credit is currently $12,920,000, it is scheduled to be reduced to an inflation-adjusted $6,800,000 in 2026. For 2023, the annual gift tax exclusion increased to $17,000, allowing you to be able to gift $17,000 (or $34,000 married filing joint) to each person without affecting your lifetime estate and gift tax unified credit. Be mindful that the annual gift exclusion does not carry over to the following year.  

High net-worth families who can afford to make large gifts may also want to consider using some, if not all, of their $12,920,000 unified gift tax exemption amount before it sunsets in 2026 to $6,800,000. This move will help remove as many assets from your estate as possible while the unified credit remains high.

The tax strategies discussed here are generally beneficial to many taxpayers. Before adopting any new strategy, please consult with your financial and tax advisors to address what best suits your specific goals and situation.