Now is the time to implement year-end tax planning strategies to mitigate tax liabilities for 2023. Below are our top tax planning strategies to consider:
1. Charitable Contributions
Consider lumping 2 years of planned charitable contributions into one year to take advantage of itemizing deductions in the year of contribution and the higher standard deduction in the off year. Gifting appreciated stock to a charity is a great way to reduce your capital gain income and increase your charitable contribution, however this transaction should be started in early December to complete before year end. Also see Donor Advised Fund below for additional charitable gifting strategies.
2. Donor Advised Funds
Consider gifting appreciated stock to a Donor Advised Fund to tax advantage of a charitable deduction of the fair market value while also not recognizing the capital gain. You can also gift the appreciated stock directly to a specific charity for the same treatment, however the benefit of a Donor Advised Fund is that you may distribute the donation to qualified organizations over multiple years. We recommend you initiate the transactions by December 1st to ensure they close by the end of the year.
3. Retirement Accounts
Review your pay stubs to verify that you are maximizing your annual 401(k) contributions before year end. The 2023 maximum employee contribution to a 401(k) is $22,500 with a $7,500 catch up contribution for those aged 50 and over.
Roth IRA and Traditional IRA contributions ($6,500 for 2023) can be made now through the filing deadline, April 15, 2024, subject to limitations.
Consider converting to a Roth IRA. This is a taxable event but could be offset by other tax losses or be beneficial in a low taxable income year. Discuss a plan with your tax advisor to tax advantage of this long term strategy.
4. Health Savings Accounts (HSA)
Confirm you have maximized your 2023 annual HSA contribution limits; $3,850 for individuals, or $7,750 for family coverage (which includes married filing joint filers with separate accounts).
5. Exercising ISO Options
Exercising Incentive Stock Options (ISOs), while not included in taxable income, are an Alternative Minimum Tax (AMT) preference item. Exercising your options up to the breakeven AMT point is a way to start the 2-year ISO holding clock running while not incurring income taxes in the form of AMT. Speak with a tax professional to assist you in calculating this breakeven point for your tax situation.
6. Pass-through Entity elective tax credits (PTE)
If you own an interest in an LLC, partnership, or S-corporation, the entity may elect to withhold tax for each owner on their share of the entity’s qualified net income. This would benefit individuals who have already reached the maximum SALT deduction by paying the tax at the entity level. The entity would reduce their taxable income flowing to the taxpayer and the taxpayer would receive a withholding credit on their state income tax return for the taxes paid. For California entities, review qualifications here.
7. Tax Loss Harvesting
After this volatile stock market year, your financial advisor may suggest selling underperforming long term capital gain stock (at a loss) to offset your short-term capital gains which are taxed at a higher rate. The maximum capital loss over capital gains you can claim in any year is $3,000, however excess long term capital losses can rollover to offset gains in future years.
8. Educator Expenses
Educators can deduct up to $300 in 2023 as an above the line deduction for eligible expenses.
9. Deductions for Small Businesses
Review deductible expenses for your business. Are there costs that can be incurred before year end to be deductible in this tax year?
If you are a sole-proprietor/Schedule C filer, consider the home office expense for an area of your home that is used regularly and exclusively for business purposes to offset your self-employment income.
If you are employed by a closely-held S-Corp, consider a reimbursable plan to pay individuals for their home office expenses.
10. Business Mileage
The standard mileage rate was increased to 65.5 cents for 2023. For self-employed individuals, be sure to keep contemporaneous records like a written mileage log to deduct your business mileage.
11. Clean Vehicle Credit
The Inflation Reduction Act of 2022 updated the qualified plug-in electric vehicle credit, now known as the Clean Vehicle Credit, for purchases made on or after August 17, 2022. Review our article on which vehicles meet the requirements for a tax credit.
12. Solar Installation
In 2023, you are able to earn a Clean Energy Credit for 30% of your solar installed on your primary residence. The credit is scheduled to remain at 30% through 2032 with the passing of the Inflation Reduction Act of 2022.
13. Child and Dependent Care Tax Credit
Child Care Credits for 2023 are 20-35% of $3,000 of qualified expenses for a single child or $6,000 for 2 or more dependents. In the case of an Flexible Spending Account (FSA), the 2023 limit is $5,000.
14. Qualified Small Business Stock (QSBS)
Taxpayers can exclude gain on the sale of eligible stock under Section 1202, up to $10M or 10 times the adjusted basis at issue, as long as all requirements are met and the taxpayer has held the shares for at least 5 years. California, unfortunately, does not conform to QSBS treatment.
The 2023 gift tax limit is $17,000 and will increase to $18,000 for 2024. This is a great way to transfer wealth in incremental amounts to your beneficiaries. Also consider gifting appreciated stock to those in lower tax brackets, but be aware of kiddie tax rules for minors or student dependents.
Additionally, you can superfund a 529 plan by gifting 5 years’ worth of annual gifts at once and filing a gift tax return to report this transaction. With the gift tax limit expected to increase to $18,000 in 2024, it might be worthwhile to hold off until January 1st on this one.
Contact our team for a year end planning meeting to discuss strategies specific to your unique tax situation.
Aura Advisors is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.