2023 Individual Tax Planning Pointers

Consider Bunching Itemized Deductions
The standard deduction for 2023 is $13,850 for single filers, $27,700 for married couples filing jointly and $20,800 for heads of households. If your total itemized deductions for 2023 will be close to your standard deduction, consider timing your itemized deduction items between now and year-end. The idea is to “bunch” your itemized deductions, so they exceed your standard deduction every other year. Paying enough itemized deductions in 2023 to exceed your standard will lower this year’s tax bill. Next year, you can always claim the standard deduction, which will be increased to account for inflation.

Likely candidates include:

• Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI),
• Mortgage interest,
• Investment interest,
• State and local taxes,
• Casualty and theft losses from a federally declared disaster, and
• Charitable contributions.

It’s worth noting that there’s been talk in Washington of capping the value of itemized deductions (for example, at 28%). This proposal could come up again if the expiration of several TCJA provisions at the end of 2025 prompts new tax legislation, making it wise to maximize the value of such deductions while you can.

Manage Investment Gains and Losses
Sometimes, it makes tax sense to sell appreciated securities that have been held for over 12 months. The federal income tax rate on the long-term capital gains recognized in 2023 is only 15% for most individuals, but it can reach the maximum 20% rate at higher income levels. You should also consider selling stocks that are worth less than your tax basis in them (typically, the amount you paid for them). Taking the resulting capital losses this year would shelter capital gains, including short-term capital gains, which are taxed at ordinary income tax rates, resulting from other sales this year. Make sure you consider the wash sale rules before repurchasing stock that you recently sold or purchased.

Make Your Charitable Giving Plans
If making charitable donations aligns with your personal goals, there are several different ways to do so while maximizing the benefits to you.

Donor-Advised Funds
If you don’t have a specific charity or charities that you are comfortable making large donations to, you can make a contribution to a donor-advised fund instead. Donor-advised funds (also known as charitable gift funds or philanthropic funds) allow you to make a charitable contribution to a specific public charity or community foundation that uses the assets to establish a separate fund to receive grant requests from charities seeking distributions from the advised fund. Donors can suggest (but not dictate) which grant requests should be honored. You claim the charitable tax deduction in the year you contribute to the donor-advised fund but retain the ability to recommend which charities will benefit for several years.

Donation of Appreciated Assets
If you give such assets to a public charity, you can deduct the full fair market value of the donated asset. Charitable gifts of appreciated property to a private nonoperating foundation are generally only deductible to the extent of your basis in the asset. But there’s an exception for qualified appreciated stock (generally, publicly traded stock), which can qualify for a deduction equal to its fair market value if it’s donated to a private nonoperating foundation.

Qualified Charitable Distribution
If you are age 70½ or older, consider a direct transfer (of up to $100,000 per person) from your IRA to a qualified charity. This is known as a Qualified Charitable Distribution (QCD). While you will not be able to claim a charitable donation for the amount transferred to the charity, the QCD piece of your distribution is not included in Adjusted Gross Income and would count toward your Required Minimum Distribution (RMD).

Convert Traditional IRAs into Roth Accounts
A Roth IRA can safeguard part (or all) of your retirement savings against future tax rate increases. Because you must pay tax on the conversion as if the traditional IRA had been distributed to you, converting makes the most sense when you expect to be in the same or higher tax bracket during your retirement years. If that turns out to be true, the current tax hit from a conversion this year could be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s post-conversion earnings. Also note that you do not have to convert a traditional IRA into a Roth all at once, you can convert varying amounts over several years depending on your personal situation.

Take Advantage of the Annual Gift Tax Exclusion
If you think your estate may be taxable, annual exclusion gifts (perhaps to children or grandchildren) are an easy way to reduce your taxable estate. The annual gift exclusion allows for tax-free gifts that don’t count toward your lifetime gifting exemption. The basic estate, gift, and generation skipping transfer tax exclusion is scheduled to fall from approximately $12 million ($24 million for married couples) in 2022 to $5 million ($10 million for married couples) in 2026. For 2023, you can make annual exclusion gifts up to $17,000 per donee, with no limit on the number of donees. This means if you are married, you and your spouse can give $34,000 per donee without paying gift tax or using a piece of your gift exemption.

Energy Credits
Individuals who make energy efficiency improvements to their existing residence may be able to claim an Energy Efficient Home Improvement Credit for up to 30% of their qualified expenses – limited to $1,200 annually. Assuming they meet certain requirements (as explained on energy.gov), expenses for items like doors, windows, air conditioning and insulation materials can be considered for the calculation of the credit.

Additionally, qualifying expenses related to solar and other alternative energy sources may qualify for the Residential Clean Energy Credit.

Consider Electing into the Pass-Through Entity (PTE) Regime
The state and local tax deduction for individuals is limited to $10,000. Over half the states have enacted legislation that allows a pass-through entity (PTE) to pay and deduct the full amount of state taxes on behalf of its partners/shareholders. If you receive significant income from a partnership or S corporation, consider participating in the PTE tax regime when asked by the entity representative. If you own a significant stake in a pass-through entity that is not electing to participate on its various state returns, consider raising the question to see if it makes sense to do so.

Contribute to Retirement Accounts
By directing funds into your 401(k) or IRA, you not only fortify your financial future but you may also create an immediate impact on your tax liabilities. Contributing to these accounts allows you to capitalize on valuable tax advantages, such as tax-deferred growth and potential deductions. For 2023, individuals can contribute up to $22,500 to their 401(k), with an additional $7,500 catch-up contribution for those aged 50 or older. Traditional IRA contributions max out at $6,500, with a $1,000 catch-up provisions (for individuals over 50). IRA contributions must be made before April 15, 2024 to be considered a 2023 contribution.

Taking a little time now to plan for next year can have a big impact on your next tax bill.

Happy Holidays to You and Yours!

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