BY MATTHEW BURNELL
“It’s that time of the year, and I don’t mean just the holiday season, even more exciting it’s time for year end financial and tax planning! The following are some topics that you may want to discuss with your tax accountant or financial advisor.
One year end strategy is “tax loss harvesting”. You or your financial professional may be selling equities in non-retirement accounts throughout the year. If selling at a price higher than the purchase price, you have a capital gain on the sale which is taxed according to your income bracket and the amount of time the security was held. With the goal of reducing tax on capital gains, you can look to offset some of the gains by selling other securities in your portfolio that have a loss.
This should be done strategically considering the investment philosophy of your portfolio. Note, repurchasing the same or substantially identical security that you sold for a loss within thirty days, or the loss may be considered a “wash sale” and disallowed.
Now may also be a time to review your withholding on your salary heading into the new year. If you keep owing a large tax bill in April and would prefer to pay this over the course of the year instead, and if applicable reduce interest and penalties your withholding percentage may not be aligned with your income tax rate. For example, if your effective Federal Tax Rate is 25% and the withholding on your paystub is 15%, there is a 10% gap here and you will likely owe taxes in April if you have not been making estimated payments. You can adjust your withholding on form W4 provided by your employer.
Maxing out your retirement contributions is a way to reduce taxable income as well as save for retirement. If you are using a pre-tax plan such as a 401K or 403(B). The maximum contributions for 2023 to a 401K is $22,500 plus an extra $7,500 if over the age of fifty. For example, a client is over age 50 and earns $120,000. If they contribute $30,000 to a 401K that reduces taxable income (aside from FICA taxes) to $90,000 for the tax year. So, you have deferred taxes on this $30,000 as well as set aside money for retirement that can grow over time.
At a certain age, depending on date of birth an individual is required to start taking distributions called required minimum distributions (RMD’s) on their traditional retirement accounts. An RMD is calculated for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes. This is important because if the RMD is not taken, late or insufficient, then a 25% (or 10% if made up in two years) excise tax may be assessed on insufficient amount. If you do not need the money and do not want to pay tax on an RMD, there are options such as making a Qualified Charitable Distribution directly from your qualified account to a public charity not to exceed $100,000 in a year and removing this distribution from your taxable income.
Another strategy is to look at converting qualified assets such as a 401(K) or traditional IRA into a Roth IRA. Note, that this is a taxable event, so it is prudent to work with your tax advisor to determine the tax implications and devise a strategy for doing this strategically over time to consider the tax consequences. Roth IRA’s may be beneficial in the long haul in that unlike traditional IRA’s, Roth IRA’s are not subject to RMD’s and are not taxed at distribution if over age 59.5.
Implementation of the SECURE Act materially increased the standard deduction and limited certain itemized deductions such as state and local taxes. Taxpayers either take the standard deduction or itemize whichever is more beneficial from a tax standpoint. With a bigger standard deduction to.”