Year-end planning ideas for 2023 to lighten the tax burden

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 11/08/23

As year-end approaches, there may be steps taxpayers can take to better manage their current tax bill or to hedge the risk of future higher tax rates. Now is an opportune time to assess finances and determine if adjustments are needed. It is especially timely since, for many options, there is a limited window to act before the end of 2023.

Important first step: Estimate income for 2023

Determining a reasonable income projection for 2023 can help taxpayers identify their likely marginal tax bracket. This is an extremely important data point since it can provide clarity on several key areas, including:

  • What is the (tax) cost of realizing additional income before the end of the year?
  • What is the (tax) benefit of reducing income before the end of the year?
  • How much income can I potentially realize before creeping into the next tax bracket?

Projecting income is fundamental to determine whether a range of tax-related strategies may or may not make sense. These strategies may include Roth IRA conversions, harvesting losses, and accelerating or delaying deductions.

Key year-end tax planning strategies to consider

Identify opportunities to harvest tax losses

In the process of reviewing portfolios, there may be opportunities to strategically generate losses through selling certain securities or mutual funds to offset capital gains. For example, using a tax-swap strategy for mutual fund holdings may allow a taxpayer to realize a tax loss while retaining essentially equivalent market exposure.* Taxpayers need to be aware of the IRS wash sale rule, which prevents investors from deducting losses when they reinvest proceeds of a securities sale in substantially identical securities within 30 days of the original sale (see IRS publication 550, Investment Income and Losses, for more information). Also see "Using Investment Losses to Your Advantage."

Utilize Roth strategies to hedge the risk of higher taxes in the future

Given rising federal budget deficits and the expiration of existing tax rates in 2025, taxpayers may want to consider using Roth strategies now as a hedge against the risk of higher tax rates in the future. For example, determine how much income can be realized within the current tax bracket before “creeping” to the next tax bracket as a basis for how much in traditional retirement funds to convert to a Roth. Or make a backdoor Roth IRA contribution by contributing to a non-deductible, traditional IRA, and then subsequently converting those funds to a Roth IRA. This approach may help certain higher-income taxpayers effectively fund a Roth IRA even if their income level prohibits them from making a direct contribution to a Roth IRA. Before executing this strategy, it is important to consult with a qualified tax professional who can determine if this strategy makes sense for a particular situation. Learn more in "10 Roth strategies to hedge the risk of higher taxes."

Maximize use of the zero percent tax bracket for capital gains

Taxpayers in lower income tax brackets may be able to avoid taxation on long-term capital gains and qualified dividends. Here are the taxable income limits for 2023 where the zero percent tax rate on long-term capital gains apply:

zero percent tax bracket

For example, a taxpayer could sell a security, realize a capital gain, and not owe any tax on that capital gain if taxable income (including the income from the capital gain) does not exceed these thresholds.

Timing certain tax deductions

In addition to timing income before the end of the year, taxpayers may be able to time certain deductions. For example, consider unreimbursed medical expenses, which can only be deducted from income once qualified expenses exceed 7.5% of adjusted gross income (AGI). Assuming an AGI of $100,000, this means that no deduction is available until qualified, unreimbursed medical expenses exceed $7,500. A taxpayer who has already met this threshold for 2023 may be able to generate additional medical expenses before the end of the year. For example, scheduling a medical procedure to occur before the end of the year if possible.

Another example is related to charitable donations. Taxpayers, especially those who are committed to regular charitable donations, may see the appeal of “lumping” deductions into one year and itemizing deductions on the tax return for that particular year. For example, instead of making consistent charitable gifts each year, consider making a large gift in one year or funding a donor-advised fund if that allows you to itemize deductions on your tax return. In other years, claim the expanded standard deduction. Depending on the situation, this may result in tax savings.

Business owners may be able to transform net operating losses into tax-free income

Business owners recording a net operating loss (NOL) this year may be able to use it to their advantage. Unlike net capital losses, where taxpayers are limited to using only $3,000 annually to offset ordinary income, NOLs can generally be applied against 80% of taxable income. Some taxpayers carrying forward large NOLs can use those losses to offset the additional income from a Roth IRA conversion. The rules are complicated, and it is critical for an individual to consult with a qualified tax professional. For more detail see “Apply a net operating loss to a Roth IRA conversion.”

Financial professionals: Register for our November 9 ( 1 p.m. ET) webinar, "Top year-end planning considerations."

link to register for webinar