2023 Year-End Tax-Planning & Preservation Strategies
Authored by: Walter Pardo, CWS®️, PPC™
At Wealth Financial Partners, we understand that when it comes to managing your finances, there are countless factors to consider. Year-end tax planning is a crucial element in your overall financial strategy, especially if you belong to the category of high-net-worth families. Our commitment is to ensure that you never pay more in taxes than what is legally required. With 2023 drawing to a close, it's the perfect time to review your year-end tax planning strategies to safeguard your hard-earned wealth.
Here are six essential areas I’m talking to my clients about and what you should address to make the most of your financial situation before the upcoming Tax Day.
Strategize with Future Projections
Looking ahead is key for achieving financial success. An income projection provides a roadmap to estimate tax payments and plan for future expenses. This is especially important if you expect changes in your income or cash flow. Begin by reviewing the income and deduction information from your previous tax return. Then, adjust it with any new or current information you have. An income projection offers a dependable roadmap to predict your estimated tax payments and plan for future expenses, particularly in situations where your income may decrease, or your household experiences reduced cash flow.
Unlock Tax Benefits with a Roth IRA Conversion
A Roth IRA conversion can be a valuable tax-saving tool. It allows you to convert a traditional IRA or 401(k) into a Roth IRA, where contributions are made with after-tax funds, and withdrawals are tax-free. The timing of this conversion should align with your financial situation and market conditions. It's a decision that can impact your tax bracket, Social Security benefits, Medicare premiums and college financial aid.
Evaluate Your Retirement Account Contributions
Take advantage of retirement accounts with tax benefits, like the 401(k) and traditional IRA, to maximize your savings. By contributing to these accounts, you can lower your taxable income. In 2023, the maximum contribution for a 401(k) is $22,500 (or $30,000 if you're 50+). For traditional and Roth IRAs, the maximum contribution is $6,500 ($7,500 if you're 50+). Investing in a traditional IRA and contributing the maximum can help reduce your taxable income and lower your tax bill. While contributions to a Roth IRA are not tax-deductible, you can enjoy tax-free withdrawals after age 59½, as long as you've owned the account for at least five years.
Optimize Tax-Efficient Investment Vehicles
Take advantage of savings plans and accounts that offer tax benefits, such as health savings accounts (HSAs). Ensure you maximize deductible contributions to lower your taxable income and explore the potential for rolling over HSA funds for retirement or long-term care planning.
Bunch Your Charitable Contributions
The 2023 standard deduction for married couples filing jointly is $27,700, while for single individuals, it is $13,850.¹ Taxpayers who donate significant amounts to charities but fall slightly below the standard deduction threshold may want to consider a strategy called charitable bunching. This involves consolidating donations typically made over several years into a single tax year. By contributing through a donor vehicle, such as a donor-advised fund (DAF), individuals can receive a tax deduction by itemizing their contributions. Engaging in charitable bunching can help minimize your tax burden in the long run and maximize what you can give to charity. Another popular tax-saving strategy called qualified charitable distributions (QCD) is beneficial if you’re planning to withdraw from your IRA and looking to make charitable donations, but it will depend on your unique financial situation.
Enhance Potential Returns Through Harvesting
There are certain steps you can take to maximize your net returns on your investments. One example is tax-loss harvesting, which typically is thought of as an end-of-the-year exercise or applied year-round during market dips and when rebalancing your portfolio. It refers to identifying and selling an asset that has performed below its purchase price. The difference between the amount you initially paid for the asset and the sell price is then applied against future capital gains to help lower your tax bill. Up to $3,000 can be applied annually with any additional amount carried over to subsequent years.²
Taxes are an inevitable part of managing your wealth. By working with a financial advisor who has a strong understanding of how taxation affects your overall financial picture, you can potentially create more opportunities for you and your family. We understand how complicated investing, planning for the future and dealing with taxes can be. That's why we're here to guide you through it all. If you're ready to learn more or are interested in a complimentary, no-obligation consultation, we invite you to reach out to our team today.
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Sources:
IRS: What’s New for 2023
