Individual year-end planning tips
Individual year-end planning tips vertical

Individual year-end planning tips

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As your clients begin to file their taxes for 2023, tax advisors can optimize their strategy in the following ways. 

Roth IRA conversions

Considering the widespread investment losses last year, clients can convert a portion of a traditional IRA at a lower marginal tax rate. After conversion, the Roth IRA would appreciate tax free until the taxpayer would like to start taking withdrawals of that money. It can be then used in retirement as a mechanism for tax redistribution or as a legacy asset.

Tax-loss harvesting

If a client’s losses outstrip gains due to 2022 market volatility—perhaps due to steep declines in cryptocurrency value—firms can claim capital losses. These tax assets can offset up to $3,000 of income ($1,500 if married filing separate), and roll over to future years when gains need to be offset.

In addition, cryptocurrency assets are not subject to the wash sale disallowance rules. And depending on a client’s accounting method for tracking crypto, a practitioner can use various methods, including “specific identification” or “HIFO” (highest in first out) to create losses for the assets.

Capital losses can be used in tandem with qualified opportunity zones: Tax breaks created by the Tax Cuts and Jobs Act of 2017. This allows clients to delay capital gains until 2026, while harvesting more capital losses. Furthermore, after the 10-year mark, held qualified opportunity zones’ capital gains are tax free.

Charitable giving

For donors who have appreciated securities in a taxable account, using their appreciation to fund philanthropic goals allows them to receive a fair market value deduction. Furthermore, they do not need to pay tax on the capital gains inherent in that security. It is often advisable to contribute appreciated assets, but when there are stocks that have underperformed, it might also be advisable to sell those stocks at a loss, claim a capital loss, and donate the cash proceeds to charity. This way, a taxpayer can use the capital losses to offset ordinary income (up to $3,000) and get a charitable donation if the taxpayer itemizes their deductions.

Charitable donations can also be bundled, itemizing in the current year and taking the standard deduction the following year.

As interest rates increase, charitable remainder trusts also become more viable. They allow clients to create a charitable legacy, obtain a deduction, and retain an income stream of payments.

Maximize retirement, education, and health savings accounts 

These tried-and-true vehicles manage taxable income and serve as assets to be used in the future. If the taxpayer is an employee and their tax situation would allow for a contribution to a traditional IRA, taxpayers can put away up to $6,500 ($7,500 if you are age 50 or older) for tax year 2023.

Consider contributing to a traditional IRA to offset ordinary income. If the taxpayer is self employed, consider contributing to a SEP IRA or a defined benefit plan.

The taxpayer can also invest in 529 college savings plans where their funds will grow tax free, and the taxpayer does not have to pay income taxes on distributions when the money is used for eligible education expenses. The maximum contribution for 529 college savings plan is $17,000 before having to file a gift tax return for tax year 2023.

Also for tax year 2023, if a taxpayer is covered by a high deductible health plan (HDHP), then the maximum deduction for individuals is $3,850. If you have a family HDHP, then you can contribute up to $7,750.

Editor’s note: Visit the Intuit® Tax Pro Center regularly for continuous tax updates.

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